Adjusted EBITDA is the number the whole deal is priced on, and it is the number most open to interpretation. The gap between reported earnings and adjusted earnings is a list of add-backs: costs the seller argues are not really part of the business. Some are legitimate. Some are wishful. The add-back audit is where you find out which.
Why add-backs decide the price
Buyers pay a multiple of adjusted EBITDA. So every dollar of add-back the seller can justify is a dollar times the multiple added to the price. On a 5x deal, a $200k add-back is a million dollars of value. That asymmetry is exactly why add-backs get generous, and why they deserve a line-by-line audit rather than a glance at the summary.
The three questions for every add-back
For each adjustment, ask three things. Is it real: did the cost actually exist, and is it in the financials you can see? Is it one-time: or does something like it recur every year under a different label? Is it the buyer's to keep: an owner's above-market salary normalises down, but "one-time" consulting fees that appear three years running are recurring costs wearing a costume.
Where the soft add-backs hide
| Add-back | The claim | The check |
|---|---|---|
| Owner compensation | Above-market salary normalises to a hire | The real cost of a replacement manager |
| "One-time" professional fees | Non-recurring legal or consulting | Whether similar fees appear in prior years |
| Personal expenses | Run through the business, add them back | Documentation, not assertion |
| Discontinued lines | Losses that will not repeat | Whether the revenue also disappears |
| Owner relationships | Free rent, family below-market wages | The cost once the owner is gone |
The discipline is the same as the rest of diligence: take the figure from the source, trace it to a document, and treat any add-back that cannot be evidenced as a question, not a fact.
A worked example
A seller adds back $180k of "one-time" consulting. The adjustment lifts adjusted EBITDA and, at a 5x multiple, adds $900k to the ask. The audit finds similar consulting spend in each of the prior three years, under slightly different vendor names. It is not one-time. It is a recurring cost, and removing it from the add-backs takes almost a million dollars off a defensible price.
How Deal OS surfaces it
Deal OS reads the financials and the notes and surfaces each add-back with its source line, so you can test recurrence against prior periods instead of taking the adjusted number on trust. Where an add-back in the narrative is not supported in the underlying detail, it flags the gap with both sides cited. See it on a synthetic deal in the sample brief, or run a real CIM through it for a one-time $99 with the CIM Pass, credited to your first month if you continue.
Frequently asked questions
What is an add-back in a quality of earnings analysis? It is an adjustment that removes a cost from reported earnings to show what the business would earn under new ownership, producing adjusted EBITDA.
Which add-backs are legitimate? Genuinely non-recurring costs and true owner-specific expenses, like an above-market salary or personal costs, are usually fair. Costs that recur under different labels are not.
How do buyers test add-backs? By tracing each one to source documentation and checking prior years for recurrence. Anything unevidenced is treated as a diligence request.
See what a cited, contradiction-flagging brief looks like on a sample deal at Deal OS.
The add-back audit is one of four checks in Deal OS's quality of earnings software, next to the EBITDA tie-out and the SBA 7(a) coverage test.