In brief
An EBITDA add-back is a proposed adjustment, not free earnings. Test whether the expense stops after closing, whether records support its amount and whether a buyer needs a replacement cost. Recurring expenses and unsupported savings should not increase sustainable earnings automatically. Build a bridge from reported results, show negative adjustments too, and keep unresolved items separate from supported conclusions.
Key takeaways
- An EBITDA add-back is a proposed adjustment, not free earnings.
- Reconcile the inputs to source records and make assumptions explicit.
- Use the result to frame questions, not as an assurance conclusion.
Start with reported EBITDA
Reconcile reported EBITDA to the income statement and general ledger for a consistent period. List each proposed adjustment individually with a reference, amount, economic rationale and evidence. Include negative adjustments such as temporary revenue or a missing ongoing expense. Adjusted EBITDA should describe sustainable operating economics, not the most favorable possible presentation.
Illustrative worked example
Reported EBITDA of $400,000 plus $20,000 of supported one-time legal expense less $30,000 of additional replacement salary gives $390,000 before other adjustments.
Recurring costs and missing evidence
A cost is not nonrecurring merely because its description changes. Examine multiple years, contracts and payment records. Annual repairs, repeated recruitment and ordinary customer acquisition may recur. Forecast savings are not the same as an implemented run-rate change. A tool can flag a missing invoice or recurrence risk, but cannot verify the document or determine the appropriate conclusion without review.
Illustrative worked example
A $15,000 recruiting bill appears once this year but hiring costs averaged $18,000 in prior years. Removing the full bill could overstate ongoing earnings.
Owner compensation needs a replacement cost
Separate owner pay from the market cost of the actual work. If the owner manages sales and operations, a buyer may need replacement staff even when the seller leaves. Use total compensation and a documented replacement estimate. Keep uncertainty visible and avoid adding back personal costs twice if they are already included in owner compensation.
Illustrative worked example
Owner compensation is $150,000 and a replacement role costs $110,000. The proposed net adjustment is $40,000, not $150,000. At a 4× multiple the directional enterprise-value effect is $160,000.
Frequently asked questions
Educational content — not an audit, assurance opinion, or investment or legal advice.
