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Key takeaways
- Start with a recorded expense and a defined earnings measure.
- Document why the cost is expected to disappear or change.
- Deduct necessary replacement costs and avoid counting the same adjustment twice.
Connect the adjustment to its source
Record the expense account, period, amount, payee and business purpose, together with the proposed reason for exclusion. Locate the relevant invoice, payroll entry or other support. IRS guidance explains the role of supporting records; it does not approve particular acquisition add-backs. (Source: IRS)
Ask whether the amount is already excluded elsewhere in the earnings calculation. Starting from different measures can produce different adjustments. A bridge beginning with net income should not silently be compared with one beginning with EBITDA or another measure.
Account for the work that remains
Suppose a fictional seller seeks a $25,000 adjustment for an expense, but the review identifies $17,000 of necessary replacement cost. The net increase under those assumptions is $8,000, before any other changes. The figures are illustrative and do not establish an acceptable compensation level or market multiple.
Use owner replacement cost when the expense relates to work the seller performs. Describe the duties and supporting assumptions before deciding how much, if any, of the expense can be removed.
Keep unresolved adjustments visible
Maintain separate columns for the seller proposal, reviewer conclusion and reason for any difference. The buyer diligence checklist connects this schedule with records, staffing and the future operating plan. A disputed item should remain identifiable rather than disappearing inside a rounded headline number.
SBA purchase guidance supports reviewing business records with professional help. The adjustment framework here is original educational analysis, not a prescribed SBA formula or a lender's approval. Use it to organize the evidence for sale preparation and valuation discussions. (Source: SBA)
Frequently asked questions
Is every unusual expense an acceptable add-back?
No. An unusual expense may still reflect work or risk the buyer will face. Review its cause, evidence and likely recurrence, then assess any replacement expense. A seller's description alone does not establish an accepted adjustment.
Can expected revenue growth be an add-back?
Expected growth is a forecast assumption, not an expense removed from historical earnings. Show the forecast separately with its evidence, implementation costs and uncertainty.
Does an add-back change the tax return?
The transaction analysis is separate from tax reporting. Have the accountant address any actual correction or tax question through the appropriate process. Do not rewrite historical records to match a sale presentation.
Who decides which adjustments count?
Buyer, seller, accountants and lender may use different definitions or reach different conclusions. Specify the measure and record accepted and disputed items in a reconciliation so the parties can compare the same economic basis.
Sources
Sources are dated to distinguish current guidance from earlier publications. They support the identified facts; the transaction questions and examples are educational analysis.
- IRS: What kind of records should I keep? (2026 retrieval). Retrieved September 5, 2026.
- SBA: buying an existing business or franchise (2026). Retrieved September 5, 2026.