Seller add-backs: what evidence should a business buyer ask for?

A seller's proposed add-back is a claim about an expense and how earnings should be presented. Ask for the original expense, the reason for the adjustment, evidence about recurrence and any cost that would replace it under the proposed ownership arrangements. A receipt can establish that money was spent; it does not, on its own, establish that the expense should be removed from earnings.

This guide is for a buyer given an “adjusted profit” schedule that exceeds the profit in the accounts. You do not need to accept or reject the whole schedule at once. Put each proposal into an evidence log, preserve the seller's amount and let the accountant record the treatment and unresolved assumptions separately.

Establish the starting earnings measure

Before discussing adjustments, identify the exact report, period, currency and profit line being adjusted. Net profit, earnings before interest, tax, depreciation and amortisation (EBITDA), and seller's discretionary earnings are not interchangeable labels. Ask the preparer to define the measure and show the bridge from the supplied accounts.

If an item is already excluded from the starting measure, adding it again duplicates the adjustment. Interest or depreciation might already have been removed in an EBITDA bridge. Owner remuneration might appear in both a payroll adjustment and a broad owner-benefits line. The schedule needs source-level links so those overlaps can be checked.

The Australian Government's financial due diligence guidance supports gathering and independently checking underlying financial records. The log below is an original way to organise that work; it is not a statutory test that determines which add-backs must be accepted.

Three distinct questions about evidence

Was the expense actually recorded? Obtain the general-ledger entry, account classification, period and relevant invoice or payroll support. Confirm that it reduced the particular starting earnings figure. A bank payment alone may not tell you when the expense was recognised or whether it was a purchase of an asset.

Why does the seller propose removing it? Record the seller's explanation without changing it into a finding. “Personal”, “discretionary” and “one-off” are reasons to investigate, not evidence categories that automatically resolve the proposal.

What happens to the underlying need? If the expense funded necessary work or an operating resource, consider who would perform the work or provide the resource after the transaction. The accountant may need a supported replacement-cost assumption, even when the seller will stop receiving the existing payment. Keep that assumption distinct from historical evidence.

Personal use does not settle the whole amount

Suppose a vehicle expense contains both business and private use. An invoice may show the total paid, while usage records and the seller's explanation are needed to support any allocation. Do not label the entire expense personal because the owner also drove the vehicle outside work.

Ask whether the business would still need transport and whether the proposed operating arrangement includes a vehicle, reimbursements or another solution. Those are questions for a scoped professional assessment. This article gives no tax-deductibility conclusion and no universal private-use percentage.

The same discipline applies to travel, meals, communications and subscriptions. Check what the spending supported, whether it helped generate the reported activity, and whether removing it would require a substitute. A buyer's intention to spend less is a future plan, not evidence that the historical cost was unnecessary.

A one-off invoice can fund a recurring need

An equipment repair might occur only once in the year under review, yet the business may require ongoing maintenance. A recruitment invoice can relate to a particular vacancy while staff turnover remains a continuing cost. A website rebuild can contain both an unusual project and ongoing hosting or support.

Request comparable ledger detail for prior periods, invoices that describe the work and information about the next expected requirement. Do not infer “never again” from one year's ledger. If the cost's future recurrence remains uncertain, record that uncertainty rather than calculating a permanent uplift in earnings. BDO Australia's description of financial due diligence places non-recurring-item adjustments within a tailored earnings review, rather than a universal checklist of approved expenses.

This is why the review period matters. A thin historical pack can make an ordinary intermittent expense appear exceptional. A longer pattern may help the accountant assess recurrence, but the chosen period and limitations should be explicit.

Owner and family work needs a role description

Ask what each person does, their hours, responsibilities and the evidence for those descriptions. Separate payment to the person from the work the business requires. An owner leaving the payroll does not make ordering stock, managing staff or dealing with customers disappear.

Do not insert a convenient replacement salary from a national average or another industry. A usable benchmark must match the role, location, responsibilities, time commitment and relevant employment costs, and have an identifiable source and date. Where that evidence is absent, leave the replacement cost unknown. Specialist firm Bizval's owner-remuneration explanation illustrates why role and workload matter; it does not supply a benchmark for your target business. This guide supplies no invented wage benchmark.

If the buyer intends to do the work personally, that should be an explicit scenario for the adviser. It does not turn adjusted earnings into passive income or cash available to take home. Financing, tax, working capital, capital expenditure and the buyer's own labour are separate considerations, with their own professional analysis.

Keep evidence status separate from adjustment approval

Use the add-back evidence log to record proposal ID, entity, period, currency, expense, amount, source entry, seller rationale, recurrence evidence, replacement requirement, reviewer status and next question. It is a static editable resource with no calculation or automatic acceptance rule.

These fictional rows are hand-built teaching examples, not accepted adjustments or software findings. An amount field can remain blank until supported; blank means unknown, not zero. A reviewer might confirm the original expense while leaving the proposed add-back unresolved.

Resolve overlaps before presenting a bridge

Assign each source expense a stable reference. If two proposals point to the same ledger entry, ask whether they overlap before adding either to an earnings bridge. For an invoice allocated across several accounts, reconcile the proposed allocation back to the original amount and preserve the basis used.

Keep seller-proposed, reviewer-supported, disputed and unresolved amounts in separate fields. A rejected proposal should not disappear from the record: retain the reason so a later version does not quietly reintroduce it. Equally, a request for more evidence is not a finding of wrongdoing.

When the accountant prepares an adjusted earnings bridge, it should show the starting figure, each approved adjustment, any replacement-cost deductions, period, currency, source references and method. This evidence log deliberately stops before that calculation. It does not provide a valuation multiple or a price recommendation.

The conversation to have before relying on the schedule

Ask the seller which exact expenses underlie each proposal and whether the same item appears elsewhere. Ask the accountant which adjustments have sufficient support, which need a benchmark, and which remain judgement-dependent. Ask both which new information would change the assessment and how revisions will be recorded.

Acquire can be discussed as a preliminary review of proposed add-backs against supplied evidence within its demonstrated workflow. That is not automatic professional acceptance of every adjustment, an owner-replacement-cost service or a valuation. For the wider distinction, read financial evidence review, quality of earnings and audit. If relevant, enquire about Acquire early access without attaching confidential documents; the enquiry prepares an email and does not itself start a review.