Your accounts show the business as you run it, with your salary, your car and the year the roof needed replacing. A buyer wants to see the business as it would run under them. The adjustments that bridge the two are called add-backs, or normalisation, and they change the value by the multiple. At five times, a £20,000 add-back that a buyer accepts is worth £100,000 of price. One they reject is worth nothing, and a pile of rejected ones costs you credibility on everything else.
What an add-back is
An add-back is an adjustment to reported profit for income or costs that would not continue under a new owner. Most increase profit. Some reduce it, and an honest list includes those too. Adjusted EBITDA, the figure a buyer multiplies, is reported EBITDA plus or minus these adjustments.
Add-backs buyers commonly accept, with evidence
- Owner pay above a market salary. If you pay yourself well above what it would cost to hire a replacement to do your job, the difference can be added back. The reverse also applies: if you pay yourself little and take dividends, a buyer will deduct the cost of paying a replacement properly.
- Family members on the payroll who do not work in the business, or are paid well above their role.
- Genuinely one-off costs: a legal dispute that is settled, a restructuring, a one-time project.
- Personal costs run through the company: a car, insurance or travel that a new owner would not incur.
- Related-party arrangements at non-market rates. If you own the premises and charge the company rent below the market rate, a buyer will reduce profit to a market rent. If you charge above market, the difference may be added back.
- Non-recurring income such as a one-off grant or the profit on selling an asset. This one reduces profit.
Add-backs buyers usually reject
- "One-offs" that happen every year. If there was a different exceptional cost in each of the last three years, a buyer will treat it as a normal cost of doing business.
- Savings that have not happened yet. "We will save £40,000 when we move suppliers" is a plan, not profit.
- The buyer's own synergies. Savings that only exist once the business is merged with the buyer belong to the buyer. They will not pay you for them.
- Anything you cannot evidence. Cash income outside the books, or costs you say were personal but cannot show, will be ignored at best.
The evidence standard
A buyer's accountant will usually test your adjustments during due diligence, often in a quality of earnings review. Each add-back should have:
- a clear description and the amount for each of the last three years;
- the documents that prove it: payslips, invoices, the lease, a settlement letter;
- an explanation of why it will not continue under a new owner;
- a market comparison where relevant, such as the salary for a replacement managing director or a rent valuation.
Keep this as an add-back register, updated every year, not assembled in the month before a sale. A register prepared in advance reads as a well-run business. One assembled under pressure reads as a negotiating position.
What the evidence is worth
An illustration using the example business in the Harvest valuation calculator. Its owner claims £55,700 of add-backs. Weighting each by its evidence and the likelihood a buyer accepts it, about £42,500 would count. At the multiple that business earns, about 4.2 times, the £13,200 that does not count is worth roughly £55,000 of price. Most of that gap is paperwork.
How the calculator treats add-backs
In the calculator, you mark each adjustment by its evidence and by whether a buyer is likely to accept it. Unverified items count as nothing. Items a buyer might accept count at half. It is deliberately cautious, because a buyer will be. If your number improves when you evidence an adjustment, that is the cheapest value you will ever add.
Next
Add-backs fix the profit figure. The multiple then decides what it is worth. Read EBITDA multiples in the UK for the seven levers that move it, or how a buyer builds a price for the whole method.
General information to help you prepare, not tax, legal or financial advice. Rates and rules change; check the current position and take advice on your own circumstances.
