By definition, add-back expenses are expenditures that are not going to influence the value of your business once you decide to sell it. Why? Because these are one-time costs wherein the new owner can’t expect benefits from especially in terms of net expected cash flows in the future.
Classic examples of add-backs include, but are not limited to:
• Your above-market salary
• Members of the family included in the payroll that receive above-market salary
• Perks that are not 100% related to the business like a cellphone, a car, and a laptop and so on
• Benefits that are beyond customary
• Charitable contributions
• Meals or entertainment perks
• Lease payments
• And items that are truly and honest one-time in nature
Because business operations can be quite complex at times, especially if the owner’s personal interests get into the mix, it is recommended that a line be drawn between the expenses that your business incurs and those that you personally incur. To do this, you might need the help of a wealth planner or a business consultant. Of course, the person you choose must be well trained and certified in business-related matters.
To correctly identify your personal and non-personal expenses that recur and add them back, a normalization process will be undertaken. Once done correctly, such a process will be instrumental in improving the value that your business’ future owner will expect; and therefore, improve your business’ selling value as well.
Why would you bother to do all these? Because when you’re planning your exit strategy, you need to understand one vital piece of information: it is your responsibility to show the potential owner the power of your business in terms of its expected earnings.