When a broker or an accountant talks about normalised earnings, add backs are most of what they mean. They matter because price is usually a multiple of earnings, so every dollar of accepted add back is multiplied. Every dollar rejected is multiplied too, in the wrong direction.
What an add back actually is
Your accounts are prepared to work out tax, not to sell the business. They legitimately include costs a new owner would never carry. An add back puts those costs back so a buyer can see what the business genuinely earns.
The test is simple and buyers apply it consistently. Would the next owner still incur this cost? If not, it comes back. If yes, it stays out.
What normally survives
Owner wages above or below market. If you pay yourself well over what a manager would cost, the difference comes back. If you pay yourself nothing, a market wage comes off, and that surprises owners more than anything else on this list.
Genuine one off costs. A legal dispute that is finished. A one time consulting project. A flood repair. Evidence needs to show both that it happened and that it is over.
Private vehicle and travel. Where a vehicle is genuinely personal rather than operational. Note that a ute the business actually needs is not an add back, it is a working asset.
Non trading expenses. Family members on the payroll who do not work in the business, personal insurance, private subscriptions. All of these hold up when documented.
Non cash items. Depreciation and amortisation, in the ordinary way, subject to a realistic view on what the equipment will need.
What normally gets rejected
Ongoing costs described as one offs. Legal fees appearing in all three years are not exceptional, they are a cost of your business.
Personal spending the business relies on. If the client entertainment actually wins the work, a new owner will still be spending it.
Anything without a document. This is the big one. An add back you cannot evidence is not a negotiating position, it is a hole. And it does damage well beyond its own value, because it makes the buyer wonder what else is not quite right.
Owner labour with no replacement cost. If you and your spouse both work full time and neither takes a wage, two market wages come off. You cannot add back the wage you never paid without also accounting for the work you did.
How to prepare them
Build a schedule. One line per add back, one column for the amount in each of the last three years, and one column naming the document that proves it. Invoice, contract, bank statement, whatever it is.
Then be ruthless with your own list. Strike out anything you would not accept if you were buying. A tight schedule of defensible add backs is worth far more than a long one that falls apart in week three, because the long one costs you both the money and the buyer's trust.
The point
Add backs are the difference between what your accounts say and what your business is worth. Prepared properly they are one of the highest value pieces of work an owner can do before going to market. Prepared carelessly they are the reason a deal gets repriced after everyone has shaken hands.