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Key takeaways
- Identify the recorded expense and why the seller seeks an adjustment.
- Show costs that remain necessary after the owner leaves.
- Keep forecast growth apart from the results already earned.
Why it matters in a senior care sale
The same reported profit can support different sale discussions if the parties use different adjustments. A seller may say that an expense will end with the owner's exit. A buyer may find that the work still needs to be done. The useful question is what the records and operating plan support.
Start with the recorded profit figure. Name the measure used, such as net income or EBITDA, and explain how the schedule gets from that figure to the proposed result. Do not compare two totals until their definitions match.
What records support the proposal
For each item, note the expense account, amount, date, payee and purpose. Add the invoice, payroll entry or other source record. State why the seller expects the cost to change and whether it has already been removed elsewhere in the schedule.
The owner-salary exercise traces fictional gross wages, net pay and amounts withheld for employee taxes. A separate employer cost appears in the records. Use its flawed worksheet to find the withheld wages counted twice before reviewing the amount proposed as an add-back.
IRS guidance explains why business records need supporting documents. It does not approve a specific sale add-back. The accountant still needs to review the proposed treatment. (Source: IRS)
A changing description deserves a separate check in the one-time expense FAQ. Its fictional records show three years of recruiting work under different labels. Follow the purpose behind each charge to test the seller’s explanation before treating the newest invoice as evidence that the operating need will end.
An illustrative example with replacement cost
Suppose a fictional seller proposes a $25,000 add-back for an expense included in starting earnings. The buyer finds that $17,000 must be spent to replace the same work. Assume that replacement cost has not already been counted elsewhere. Under those assumptions, the net increase is $8,000 before other changes. The figures show the math; they are not pay rates or a market benchmark.
Use owner replacement cost to identify work that remains. Ask who will do it, whether that person has time and what the full cost will be. Removing the owner's pay does not make the duties disappear.
How to use the result in a deal
An earnings review should also identify downward adjustments, such as omitted payroll accruals or replacement rent. An add-back schedule alone is not a complete quality-of-earnings analysis. Review those costs alongside the seller's proposed increases.
Keep the seller's request, the reviewer's finding and the reason for any difference in separate columns. Carry open items into the buyer diligence checklist. Do not bury a disputed item inside a rounded profit figure.
SBA buying guidance supports reviewing records with professional help. This earnings bridge is an educational method, not an SBA formula or loan approval. Use it during sale preparation to make the proposed earnings easier to check. (Source: SBA)
For the broader review, quality of earnings considers the starting records and both upward and downward changes. The financial-statements guide shows how a historical correction connects to unpaid liabilities and cash, while keeping the buyer's future assumptions separate.
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.