Definition
Add-backs are expenses your business reports on its tax return that wouldn't continue under a new owner. The personal vehicle the business pays for. Your spouse's salary if they don't really work in the business. The country club membership filed as "business development." A one-time legal bill from a lawsuit that's resolved. Each one gets added back to your reported profit to show what the business actually earns. Done right, add-backs are how a business with $200K in tax-return profit shows $400K in real SDE.
What it means for you
Add-backs are how a business reports lower profit on its tax return than it actually earns — and how that real earning power gets shown to a buyer.
The buyer’s lens
Buyers sort add-backs into three buckets in their head: clean, gray, and disallowed.