Every seller knows the dance: inflate adjusted EBITDA just enough to wow prospective buyers without crossing the line into fantasy. In the heat of a fast-moving mergers and acquisitions (M&A) process, those tidy little “adjustments” can look like free value, especially when a banker’s deck shows a dramatic multiple of a bigger number.
The problem? As soon as the data room opens and the buyer’s quality-of-earnings team starts tracing invoices, weak add-backs snap like dry twigs. Add-backs, when used correctly, are a legitimate way to normalize earnings and highlight the forward-looking performance of a business. One-time legal expenses, a founder’s personal car lease, hurricane-related shutdown costs — fair game.
Where sellers get tripped up is by pushing the definition of “non-recurring” or “extraordinary” until it becomes laughable. Seasoned diligence teams have seen every flavor of optimism, and the surest way to lose credibility early is to make them roll their eyes on page one of the workbook.
Common Offenders That Get the Side-Eye
Certain categories of adjustments almost always trigger a chuckle — or an outright strike — from buyers and their advisors. While every deal is different, a few patterns surface again and again:
COVID-Forever Costs
The pandemic produced plenty of legitimate one-off expenses, from emergency PPE purchases to temporary hazard pay. But if you are still carving out “COVID cleaning” three years later, expect pushback. Buyers assume there is now a baseline of heightened sanitation or remote-work cost baked into operations.
Perpetual “Start-Up” Expenses
That new product line you launched two years ago? The launch costs are no longer non-recurring. If the product is still in the market, its support costs are simply part of doing business. Stretching the definition of “start-up” signals that management may be using yesterday’s narrative to paper over today’s margin pressures.
Owner/Family Compensation Mysteries
Re-casting the CEO’s market-rate salary is fine. Removing half the leadership team’s comp because “they won’t be needed post-close” rarely flies. Buyers know they will have to pay competitive wages, whether or not the founder’s cousin stays on payroll.
Ongoing Tech “One-Timers”
Re-platforming from on-prem servers to SaaS once? Okay. Booking “non-recurring” cloud-migration costs every single quarter? Not okay. By definition, recurring migrations are not migrations — they are your IT strategy.
Revenue Synergy Pro-Forma Hype
The crown jewel of eyebrow-raising adjustments is the “imaginary revenue” add-back: projecting what the business would have earned if the buyer’s distribution network had been in place during the period under review. Revenue synergies belong in the buyer’s model, not in the seller’s EBITDA.
What Buyers and Their Advisors Are Really Looking For
Behind every diligence request is one core question: “How repeatable is this cash flow?” Whether the buyer is a private-equity fund, a strategic acquirer, or a family office, the goal is the same — to avoid post-close surprises. When an add-back is posted, analysts test three things:
- Evidence: Is there clear documentation — invoices, contracts, board minutes — showing that the expense (or lack of revenue) was genuinely outside the ordinary course of business?
- Magnitude: Does the adjustment meaningfully distort profitability, or is it just a rounding error? Immense effort spent defending a five-thousand-dollar add-back raises the question of stewardship.
- Permanence: Will the cost (or revenue drag) truly disappear in future periods? If not, the adjustment fails the “going-forward” test.
Understanding these filters helps sellers reverse-engineer credibility. Instead of asking “How high can we push EBITDA?” the healthier mindset is “Which adjustments would a skeptical outsider nonetheless accept as fair?”
How To Keep Your Adjustments Credible
A disciplined pre-sale scrub of financials is the only reliable antidote to add-back embarrassment. The finance team, CFO, and outside advisors should attack the numbers with the same skepticism they expect from the buyer. Below are practical habits that separate the laughed-out-of-the-room add-backs from the ones that sail through:
Build a Paper Trail in Real Time
Waiting until the night before the confidential information memorandum goes out is too late. As soon as a non-recurring cost hits the ledger, tag it, file the vendor support, and note the board discussion approving the spend. Nothing calms an auditor faster than organized, contemporaneous evidence.
Define “Non-Recurring” With a Calendar, Not Optimism
If a cost spans more than twelve consecutive months, stop calling it non-recurring. Even better, align your definition with ASC-or-IFRS guidance on unusual items. The accounting literature may feel arcane, but citing it demonstrates maturity.
Quantify Savings, Don’t Guess Them
“We expect $1.2 million in annual rent savings once we consolidate offices.” Great — show the signed sublease, the contractor bids for the build-out, and the updated head-count plan. Hand-waving gets you nowhere.
Respect Materiality Thresholds
Racking up twenty-five minuscule add-backs annoys diligence teams. Focus on adjustments that move the valuation needle; you will gain goodwill by ignoring penny-ante items.
Reconcile Up, Down, and Sideways
Start with GAAP net income, bridge to reported EBITDA, then to adjusted EBITDA. Reverse the process in a separate schedule. Cross-foot subtotals so a junior associate can follow the math without calling for help. Transparency is trust.
When Humor Turns Into a Re-Trade
An add-back dismissed as ridiculous does more than dent ego: it invites a re-trade. If a buyer knocks out 10 percent of adjusted EBITDA, the purchase price multiple now applies to a smaller base. A seller hoping for a 12x exit can watch millions vaporize in a single diligence call. Worse, the loss of credibility bleeds into other facets of the negotiation.
Buyers suddenly question forecasts, customer concentration risk, and retention assumptions — even if those areas were previously solid. What began as the finance equivalent of a dad joke becomes a weapon pointed at transaction certainty.
The Bottom Line
Add-backs are neither inherently good nor evil; they are a tool. Like any tool, they can build or destroy value depending on the skill of the operator. Sellers who treat adjustments as a thoughtful normalization exercise — backed by data and governed by restraint — walk into the data room with authority. Those who view add-backs as a magic wand to conjure higher multiples quickly discover that seasoned M&A professionals carry laugh-detectors calibrated to the decibel.
When the time comes to court buyers, remember: equal parts transparency, documentation, and conservative judgment will earn you the benefit of the doubt. In the high-stakes arena of deal-making, that benefit translates directly into dollars at closing and serenity post-close. Build your case carefully, and no one will be laughing — except you, all the way to the bank.
