Add Backs for Company Valuation

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What are Add Backs?

For example, imagine an entrepreneur selling their company, but the numbers barely reflect their actual income.

Add-backs – adjustments in company valuation – ensure better comparability with similar companies, also show a more realistic EBITDA value, and overall enable a fairer company value.

Normalized vs. Run-Rate EBITDA – Typical Add-backs for SMEs

When selling a company, buyers rarely rely on the pure reported EBITDA from the annual financial statements. What is crucial is how sustainable and transferable the earning power truly is. For this purpose, various EBITDA metrics are used to cleanse the company of owner-related and special effects.

What do reported, adjusted, normalized, and run-rate EBITDA mean?

Reported EBITDA
The officially reported result. It includes all operational, non-operational, and one-off effects – and therefore often does not reflect the actual, sustainable earnings level.

Adjusted EBITDA
The reported EBITDA, supplemented by add-backs for outliers, one-off items, or non-operating expenses. This is the first step in a cleansing process.

Normalized EBITDA
The normalized EBITDA shows how the company would perform under market conditions – independently of the owner. Owner-related compensation, above- or below-market rents, private expenses, or missing roles are corrected.

Run-Rate EBITDA
A forward-looking perspective: It considers effects that have already occurred but are not yet fully visible in the financial statements (e.g., new contracts, cost savings). Particularly relevant for growing or recently restructured SMEs.

Why is this important?
Buyers do not pay for the past, but for sustainable future earning power. A clearly derived normalized or run-rate EBITDA builds trust, reduces discussions during due diligence, and often leads to better valuations.

Typical Categories of Add-backs (with Examples)

One-off or non-operating
These items do not occur regularly and distort the result.
Examples:

  • Legal costs for a one-off dispute
  • Costs for introducing a new ERP system
  • extraordinary repairs or damages
  • Gains/losses from sales of non-operating assets

Owner-related items
These no longer apply in this form after a change of ownership.
Examples:

  • above- or below-average CEO salary
  • private vehicle costs, travel, or insurance
  • family members with non-market-rate compensation
  • non-market-rate rental agreements between owner and company

Structural corrections
These show how the company would look under professional, independent management. Examples:

  • Market-rate salary for the founder, if heavily involved operationally
  • Hiring a new employee for a missing key role (Sales Manager, CFO, etc.)
  • Adjustment of unusually low or high costs due to proprietary structures

Do not include buyer synergies
Synergies that only arise through the buyer do not belong in the normalized EBITDA.
Examples:

  • IT cost savings within the group
  • Utilization of existing HR or sales organization
  • better purchasing conditions for the buyer

3-Step Self-Check for Entrepreneurs

List all relevant items
Systematically compile unusual, private, or one-off expenses and revenues – including a brief description and supporting documents.

    Clearly classify add-backs
    Categorize as:

    • one-off/non-operating
    • owner-related
    • structural
    • (Note synergies separately, but do not include them)

    Create a reconciliation to normalized EBITDA
    Starting from the reported EBITDA, add-backs are clearly added or subtracted.
    Optionally, a run-rate EBITDA can be calculated if momentum or cost measures are already a reality.

    Thorough documentation creates transparency and strengthens one’s own negotiating position.