3. Explaining the Add-Backs Game - What’s Fair, What’s Fantasy

business brokers manage the sales process methodically and professionally

how to help sellers build credible, defensible financials buyers can trust

Add-backs are a necessary part of almost every business sale, but they’re also one of the most misunderstood.

Done well, they give a buyer a clearer picture of the true profit potential of the business.

Done poorly? They come across as wishful thinking - or worse, deception.

🔎 What Add-Backs Are Meant to Do

Add-backs help normalise earnings by adjusting for -

• Owner-specific expenses
  e.g. personal car, discretionary travel, non-business meals

• One-off costs
  e.g. legal fees for a one-time lawsuit, major equipment replacement

• Non-recurring income/expenses
  e.g. government grants, sale of assets, unusual refunds

• Accounting treatments
  e.g. depreciation, amortisation, interest (for EBITDA purposes)

 When documented properly, they help buyers understand what the business would look like under new ownership.

🚩 Where Sellers Go Too Far

Here’s where the trouble starts and where brokers need to step in -

• Adding back staff wages (because the owner "could do it themselves")
  Buyers don’t want a job. They want a system with people.

• Claiming marketing costs as “optional”
  That may be true now, but it’s often short-sighted and misleading.

• Double-dipping on adjustments
  E.g. adding back their own wage and the manager’s, claiming both roles would be merged.

• Lumping together vague “lifestyle” costs
  Without detail, buyers get suspicious.

🛠 How Brokers Can Guide This Conversation

Here are 4 ways to help sellers stay credible -

• Ask - “Could a buyer reasonably eliminate this?”
  If not, it’s not an add-back.

• Ensure every add-back is documented
  Line-by-line, with explanations. Clean spreadsheets go a long way.

• Discourage grey area add-backs unless they’re defensible
  If the buyer is likely to question it, be prepared with context - or remove it.

• Focus on consistency and logic
  If you’re going to remove an expense in Year 1, you need to show how that plays out across the financials.

💬 Language That Helps

Sometimes, sellers aren’t trying to be misleading, they just don’t understand how buyers think.

Here’s language brokers can use -

• “Buyers want to know what they’re really walking into. Add-backs help, but only when they make sense.”

• “This isn’t about maximising fantasy value. It’s about making the business look credible.”

• “Add-backs that look dodgy cost more than they’re worth, because they make buyers nervous.”

 🤝 Final Thought

This part of the deal is where trust is won or lost. If the numbers feel inflated, unclear, or inconsistent, it puts everything else at risk.

Help your sellers build a clean story and you’ll build stronger deals and if you’re working on a listing now where the financials feel a bit shaky, I’m happy to help you sanity check the numbers.

👉 Book a free 15-min strategy call https://www.regenerationhq.co.nz/contact
👉 Or reply to john.luxton@regenerationhq.co.nz and let’s work through it together.