Updated
Adjusted earnings = starting earnings + eligible documented adjustments
Add-backs are expenses recorded on the books that are added back to net income when calculating normalized earnings measures like SDE or EBITDA, because they are either discretionary, non-recurring, or not expected to continue under different ownership. Common categories include owner's documented payroll salary (for SDE only), personal expenses run through the business, one-time legal or repair costs, and non-cash charges like depreciation.
Examples use made-up numbers. Education only, not tax, legal or investment advice.
The setup
Illustrative example: net income is $100,000.
Documented add-backs include $12,000 in a one-time roof repair, $4,000 in a personal vehicle lease paid by the business, and $9,000 in depreciation.
The math
Total add-backs = $25,000, producing a normalized earnings figure of $125,000 before any owner salary add-back specific to SDE is applied.
Owner question to ask: "For each add-back I want to claim, do I have an invoice, receipt, or payroll record that clearly separates it from ordinary operating cost?" Unsupported add-backs are typically the first thing a buyer, lender, or appraiser challenges.
Unique caveat: an owner's draw is never a valid add-back, since it was not deducted as an expense to begin with — only an owner's actual payroll-run salary qualifies, and only within an SDE calculation, not an EBITDA calculation. Add-backs should also be applied consistently year over year rather than selectively chosen to favor a single strong period; cherry-picking one-time add-backs from only the best year, while ignoring one-time negative costs in other years, produces a normalized figure that is not representative and is likely to be challenged during due diligence. This definition is educational and does not replace advice from a licensed accountant or tax professional familiar with your specific books.
Owners should confirm treatment with their bookkeeper before using this figure in a loan application, valuation, or tax filing. Small differences in chart-of-accounts setup can change how this number is calculated, so consistency period over period matters more than precision in any single month. Confirm the classification for your entity before applying it.
Continue with the full explainer lesson.
Definition source
IBBA — Glossary defines Add-backs and Discretionary Earnings (DE), also called Seller’s Discretionary Earnings. DE excludes income taxes, non-operating/nonrecurring items, depreciation, amortization, interest and one owner’s entire compensation. Proposed adjustments require evidence and must not be counted twice.
Questions owners ask
Can every unusual expense be added back?
No. Support each proposed adjustment with records and explain why it belongs in the defined earnings measure.
Is owner salary added back to EBITDA?
Plain EBITDA does not add back owner salary. SDE can add one working owner’s compensation that was deducted.
Can an owner draw be an add-back?
Not when it was a balance-sheet transfer rather than an expense in the starting earnings.