EBITDA add-backs: what to document before selling a NZ business

On this page

1. What buyers accept
2. What buyers are likely to challenge
3. The credibility rule
4. What it means for your number

An add-back is a cost already included in your accounts that you propose a new owner would not incur. A supported adjustment can increase the maintainable earnings used in an earnings-based calculation. At an assumed multiple of 3.5, NZD 1 of additional earnings changes that calculation by NZD 3.50; it does not establish a price a buyer will agree to pay. That makes the adjustment schedule an important part of the evidence behind a value range.

Here is the line as I've seen buyers' accountants draw it.

Adjustments a buyer may accept with evidence

• Owner pay and replacement cost. For a managed-earnings comparison, replace the owner pay already expensed with the full market cost of every role the owner performs. For example, NZD 250,000 expensed and NZD 140,000 replacement cost gives a proposed NZD 110,000 adjustment. If no owner pay was expensed, the replacement cost still needs deducting. An owner-operated earnings basis is different; match the multiple to the definition.
• Genuine personal costs with evidence. The family vehicle, the home office, personal travel, a phone. Each item needs a document and a dollar figure; "about ten grand of personal stuff" is not an add-back, it's a conversation.
• True one-offs. An insurance deductible on a flood, a redundancy on a role that no longer exists, a legal dispute that has concluded. The test is whether the buyer will face it again. If a version of it appears in two of the last three years, it isn't a one-off.
• Related-party costs restated to market, in either direction. Rent paid to your family trust above market comes back; rent below market gets deducted, and the buyer will ask for a new lease at the real rate.
• Costs of this sale. Identify transaction-specific costs separately and ask your accountant whether an adjustment is appropriate. Do not assume that every advisory cost will be accepted.
• Discontinued activities, cleanly separated. Assess associated revenue as well as costs and any expenses that continue. An adjustment needs to reflect the operation the buyer is acquiring.

What buyers are likely to challenge

• Recurring "one-offs". The annual stocktake write-down, the repair that happens every winter, the bad debt that every year has one of.
• Family members on the payroll who actually do the work. If your partner runs the office, their salary is a real cost; what you can add back is only the amount above market for the role.
• Marketing you'd stop doing. "The new owner won't need to spend that." The new owner will decide that, and will price your revenue as if it depends on the spend.
• Projected savings. Synergies the buyer might get are the buyer's to price, not yours to add back.
• Depreciation counted twice. EBITDA already excludes depreciation, so adding it back again overstates that figure. Replacement capital expenditure is a separate question for the buyer and advisers to assess.
• Unprovable anything. No invoice, no add-back.

The credibility rule

A buyer's accountant will examine the add-back schedule alongside the financials. Unsupported adjustments can undermine otherwise useful evidence. A short, documented schedule is easier to defend than a longer list of hopeful adjustments. The supporting invoices and reasoning matter more than the number of items.

For each proposed adjustment, record the amount, financial period, account, reason, supporting document and any replacement cost. Ask your accountant to check the schedule and avoid double counting an amount already excluded from EBITDA. The free earnings adjustments workbook provides a starting schedule; the value explorer includes an owner-pay earnings bridge.

My rule in a review is simple. Every add-back gets defended or dropped before the buyer sees it, and the schedule that goes to market is the one that would survive a hostile accountant with a week to spend. The aim is a defensible earnings figure, with the assumptions visible before a buyer challenges them.

What this means for your number

A difference between the owner's earnings figure and the buyer's can lead to a different value range. Finding out which adjustments have support, before listing, is one part of the Sale-Readiness Review. If you'd like to discuss how to organise your schedule, ask me.