When presenting your financials to a sophisticated buyers (like a Private Equity group or a Strategic Acquirer), credibility is your most valuable asset.
While we always want to maximize your Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), we classify add-backs into two categories: Hard (Defensible) and Soft (Risky).
1. Hard Add-Backs (Universally Accepted)
These are math-based and easy to prove. Buyers rarely argue with them.
- Owner Compensation: The difference between what you pay yourself and the market rate to replace you.
- One-Time Professional Fees: The legal bill for a specific lawsuit that is now settled.
- Rent Adjustments: If you own the building and pay yourself above-market rent, we adjust it down to fair market value.
2. Soft Add-Backs (The Danger Zone)
These are “gray area” expenses. If you include too many of these, the buyer will view your entire P&L as “cooked.”
- “Marketing” Travel: If you expensed a trip to Disney World because you handed out two business cards, a PE firm will reject it.
- Unverified Cash: “I take $50k in cash out of the register.” If it isn’t recorded, it didn’t happen.
- Family Payroll: Paying your teenager $20k to “clean the office.” Unless you have timecards proving they actually worked, this gets flagged.
The “Red Face” Test
Before we add an expense back to your profit, we apply the “Red Face Test.”
Can you sit across the table from a Harvard-educated MBA, look them in the eye, and explain why this expense is purely personal and not needed to run the business—without your face turning red?
If the answer is No, we leave it out.
It is better to present a slightly lower, rock-solid EBITDA number than a higher, questionable number. A solid number gets a higher multiple; a shaky number gets a “haircut.”