Add-backs

Definition

Expenses added back to profit to show what an owner really earned.

Why It Matters

Telling the honest add-backs from the aggressive ones is most of what screening is, because a legitimate one reflects a cost you genuinely will not carry while an inflated one is price dressed up as profit. Every soft dollar you accept gets multiplied, so a $60k phantom add-back at a 3x multiple is $180k of price for earnings that were never there.

In numbers: A $60k marketing spend added back as 'one-time' but recurring every year inflates SDE by $60k; at a 3x multiple, that is $180k of price for earnings that do not exist.