Add-backs examples: 30 common ones, rated by how well they hold up
Short answer
Common add-backs include owner salary and payroll taxes, owner health insurance, interest, depreciation, the owner's vehicle, phone, meals and travel, family members on payroll, one-time legal or repair costs, and above-market rent paid to the owner. Whether each one holds up depends on the evidence: a payroll record makes owner pay solid; a claim that a family member 'didn't really work' is shaky until staff and timesheets confirm it.
The table below rates 30 examples and lists what would move each rating.
The ratings below are typical starting points, not verdicts. Any add-back can be solid with good evidence or unsupported without it. Use the right-hand column as your document request list. Amounts are omitted because they vary by business; what matters is the reasoning.
| # | Add-back | Typical rating | Evidence that makes it solid |
|---|---|---|---|
| 1 | Owner salary / W-2 wages (one owner) | Solid | W-2, payroll register |
| 2 | Employer payroll tax on owner wages | Solid | Payroll tax reports |
| 3 | Owner health insurance | Solid | Premium invoices showing the owner's coverage |
| 4 | Owner retirement contributions | Solid | Plan statements |
| 5 | Interest on debt paid off at closing | Solid | Loan statements, payoff letter |
| 6 | Depreciation | Solid | Form 4562 (still reserve for capex) |
| 7 | Amortization of past acquisition goodwill | Solid | Tax return, schedule |
| 8 | Owner's personal vehicle | Shaky | Mileage log; proof no business vehicle needed |
| 9 | Owner's personal phone | Shaky | Bill showing personal line |
| 10 | Personal travel | Shaky | Card statements with destinations and dates |
| 11 | Meals and entertainment | Shaky | Receipts showing personal nature; customer entertaining may need to continue |
| 12 | Spouse on payroll, "not working" | Shaky | Staff confirm no duties; no timesheets |
| 13 | Child on payroll, "not working" | Shaky | Same as above |
| 14 | Second owner's salary | Unsupported | Only if the role genuinely disappears |
| 15 | Above-market owner salary (excess only) | Shaky | Market pay data for the role |
| 16 | Below-market owner salary | Deduction, not add-back | Market pay data; you'll need to pay more |
| 17 | Above-market rent paid to owner's entity | Shaky | New lease at lower rent signed |
| 18 | Below-market rent to owner's entity | Deduction | New lease at market rent |
| 19 | One-time lawsuit settlement | Solid | Settlement agreement; no similar claims in 3 years |
| 20 | "One-time" repairs | Shaky | Three-year repair history shows it's unusual |
| 21 | Relocation or remodel costs | Shaky | Invoices; expensed, not capitalized; won't recur |
| 22 | Recruiting costs for a key hire | Shaky | Invoice; staff turnover history |
| 23 | Charitable donations | Solid | Ledger; donations were owner's choice |
| 24 | Owner's personal insurance (life, disability) | Solid | Policy showing owner as insured |
| 25 | Professional fees for the sale itself | Solid | Invoices dated around the sale process |
| 26 | Owner's country club or memberships | Shaky | Statements; whether used for business development |
| 27 | COVID-era or disaster grants received | Deduction (one-time income) | Remove from revenue/income |
| 28 | Gain on sale of equipment | Deduction (one-time income) | Remove |
| 29 | Unreported cash sales | Unsupported | None possible; not on the return |
| 30 | "Pro forma" savings the buyer could make | Unsupported | Your upside, not the seller's earnings |
Three patterns to watch
- Lots of small shaky items. Ten add-backs of $3,000 each look harmless; together they're $30,000 of earnings and, at a multiple, a big chunk of the price.
- Add-backs that grow before the sale. If "personal travel" doubled in the year before listing, ask why.
- No deductions at all. A recast that only adds back and never subtracts (one-time income, below-market rent, unpaid family labor) is one-sided.
For the method behind the ratings, see add-backs. To mark them up on an actual P&L, see add-backs on a profit and loss.
Non-recurring expenses: how to tell if a 'one-time' cost really is
A non-recurring expense add-back is valid when the cost is genuinely unusual for this business and won't happen again under your ownership: a lawsuit settlement, a one-off relocation, costs of the sale itself. Test every one by laying three years of the same expense category side by side. If something similar shows up every year, it's a normal cost of doing business, whatever the seller calls it.
Every year in a small business has something unusual in it. That's exactly why "one-time" add-backs deserve the most skepticism of any category.
The three-year test
Illustrative example, not a real business
The seller adds back a $14,000 "one-time HVAC replacement" from last year. You ask for repairs and maintenance detail for three years:
| Year | Big repair item | Amount |
|---|---|---|
| Year 1 | Walk-in cooler compressor | $11,000 |
| Year 2 | Parking lot resurfacing | $16,000 |
| Year 3 | HVAC replacement (the add-back) | $14,000 |
Each item really was one-time. But every year has one, averaging about $13,700. The honest treatment: don't add back the HVAC, or add it back and set a repair reserve of roughly the same amount. Either way, earnings don't go up.
Usually truly one-time
- Professional fees for selling the business (broker, sale-related legal).
- A specific lawsuit settlement, with no pattern of similar claims.
- Moving the business to a new location, if you won't move again soon.
- Uninsured costs of a specific disaster.
Usually not
- Repairs, equipment failures, IT problems.
- Recruiting and training costs in a high-turnover business.
- Bad debts, customer refunds, inventory write-offs.
- Legal fees in a business that regularly has disputes.
- Marketing "experiments" that happen every year.
And don't forget the other side: one-time income (insurance payouts, grants, asset sales) should come out. Sellers rarely volunteer that one. More in normalized EBITDA.
Related-party rent: adjusting earnings when the seller owns the building
When the seller (or a company they own) is also the landlord, the rent the business pays may not be market rent. If it's below market, the business looks more profitable than it will be for you; if it's above market, it looks less profitable. Normalize earnings by replacing the historical rent with the rent in the lease you'll actually sign.
Get that new lease, or at least its terms, agreed before you finalize the price.
Related-party rent is one of the quietest ways a small business's earnings can be wrong. Nobody's hiding anything; the seller just set the rent to suit themselves. It becomes your problem the day you sign a market lease.
Illustrative example, not a real business
The seller's property LLC charges the business $3,000 a month ($36,000 a year). The new lease you're negotiating with that LLC is $6,500 a month ($78,000 a year), close to market. Earnings fall by $42,000 a year. If the business is priced at three times SDE on the old rent, that's $126,000 of price based on rent you'll never pay.
What to do
- Identify related-party leases in diligence: who owns the building, and is it the seller or a relative?
- Agree the terms of your new lease (rent, term, options, escalations) before the price is final.
- Replace historical rent with new rent in your SDE or EBITDA, for every year you analyze.
- Look for other related-party items: equipment leased from the owner, purchases from a relative's company, management fees.
Under SBA rules, a required QoE must document related-party transactions, and lenders review the lease. For the lease itself, see lease assignment. If the seller is open to selling the building, ask your lender about financing both.
Personal expenses run through the business: when they're valid add-backs
Personal expenses a seller ran through the business (a family car, personal phone, vacations, a spouse or child on payroll who doesn't work there) can be added back to earnings, because you won't have them. But only if you can prove two things: the money was actually spent, and it was personal rather than a business cost that will continue.
Without that proof, treat them as shaky. And remember that a seller who deducted personal costs on the tax return has a credibility problem as well as a tax one.
Almost every owner-run business carries some personal spending. Brokers present it as good news ("the real profit is higher than the return shows"), and sometimes it is. But personal expenses are also the easiest add-backs to exaggerate, because only the seller knows which receipts were really personal.
The usual suspects
| Expense | Proof that makes it solid | Common catch |
|---|---|---|
| Vehicles | Mileage logs; business owns other vehicles for work | Business needs a vehicle; part continues |
| Phones, internet at home | Bills showing personal lines | Owner's phone is the business number |
| Travel | Card statements showing family destinations | Some trips were trade shows or customer visits |
| Meals | Receipts with personal context | Customer entertaining that keeps accounts |
| Spouse or children on payroll | Staff confirm no duties; no schedule | They do the books, cover shifts, run social media |
| Personal insurance | Policy shows owner as insured | Key person cover the lender may want you to keep |
| Home office, utilities | Bills at the owner's address | Business really is run from home |
| Club memberships | Statements | Source of customer relationships |
Family on payroll, in detail
This is where most disputes happen. A seller says, "My daughter's on payroll at $35,000 but she's at college." Maybe. Check: is she on the schedule? Does her name appear on emails, invoices or social posts? Do staff know her? Is there a payroll address that matches the college town? If the answer is clean, the add-back is solid. If she's been doing the Instagram and the Saturday shift, the cost continues, just at whatever you'd pay someone else.
The bigger question
A seller who ran substantial personal costs through the business and deducted them has told you something about how the books were kept. That doesn't kill a deal, but it raises the bar for everything else: check revenue against the bank (see proof of cash), prefer an asset purchase, and ask for strong tax representations backed by a holdback. See asset vs stock.
Frequently asked questions
What are the most common add-backs?
Owner compensation and benefits, interest, depreciation and amortization, personal vehicle and travel, and one-time professional fees or repairs.
Which add-backs do lenders reject most?
Undocumented personal expenses, recurring 'one-time' costs, family salaries where the work continues, and anything not reflected in the tax return, such as unreported cash.
Is a charitable donation an add-back?
Usually yes if the business made it at the owner's discretion and you won't continue it. Check the ledger to confirm the amount.
Are startup costs for a new location an add-back?
Possibly, if truly one-time and documented. But if the new location is included in the revenue, its normal running costs must stay.
What counts as a non-recurring expense?
Costs that are unusual in nature and not expected to recur: a one-time legal settlement, relocation, a natural disaster cleanup not covered by insurance, professional fees for selling the business, a one-time recruiting fee.
Are major repairs non-recurring?
Sometimes. A roof replaced once in twenty years might be. But businesses with equipment and buildings always have some major repair each year, so test against history.
Sources
- SBA SOP 50 10 8.1, Appendix 15 (QoE must document add-backs; lender must justify adjustments)
- IRS Publication 535, Business Expenses
- SBA: 504 loans
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.