Addbacks: What Counts (and What Doesn't)

Add-backs are one of the most important — and most misunderstood — concepts in online business M&A. They can dramatically affect your valuation, but get them wrong and you'll lose buyer trust fast.

What Are Add-Backs?

Add-backs are expenses that get added back to your net income to calculate SDE (Seller's Discretionary Earnings). They represent costs that a new owner wouldn't necessarily incur.

Legitimate Add-Backs

These are widely accepted by buyers and brokers:

• •Owner salary and benefits: Your compensation as the owner-operator
• •One-time expenses: Legal fees for a trademark filing, a website redesign, conference attendance
• •Personal expenses: Personal cell phone, vehicle expenses, home office if run through the business
• •Non-cash expenses: Depreciation and amortization
• •Non-recurring professional fees: One-time consulting engagements

Questionable Add-Backs

These require strong documentation and justification:

• •Above-market salaries paid to family members
• •Excessive travel that's partly personal
• •R&D spending that's ongoing and necessary
• •Marketing experiments that are actually core to the business

What Doesn't Count

Never try to add back:

• •Core operating expenses — hosting, tools, team costs you'll always need
• •COGS — cost of goods is not discretionary
• •Ongoing marketing spend — unless you can prove it's truly optional
• •Contractor costs that are essential to operations

How to Document Add-Backs

Create a clear add-back schedule with:

1. •Each item listed individually
2. •The amount
3. •A brief justification
4. •Supporting documentation (receipts, invoices)

The Trust Factor

Overstating add-backs is one of the fastest ways to kill a deal. Buyers and their advisors will scrutinize every line item. It's better to be conservative and credible than aggressive and questioned.

Start by working with a bookkeeper or accountant who understands online business M&A. They'll help you identify legitimate add-backs while keeping your numbers defensible.