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Add-backs

Add-backs are particular business expenses that are added back to a company’s profit so as to fairly determine its true profitability.

One major legitimate way a lot of businesses minimise their tax burden is by presenting certain items as expenses on their financial statements. This practise however does not present the true profitability of a business and its valuation thereof when selling it. To determine actual profitability (especially when required for a business sale), financial statements need to be adjusted by adding them back to net income. Such adjustments are called add-backs, and can include items like:

  • Owner’s compensation and benefits
  • Extraordinary or one-time expenses items

Add-backs are closely examined by the buyer given their inclusion in the profitability of the business to determine its valuation and price at sale.