Disclaimer. This page is educational only. It is not investment, legal, tax or lending advice, and it is not a substitute for full due diligence with your own lender, attorney and CPA. Every decision is yours.
Add-backs are the adjustments a seller makes to earnings to show what the business would earn for a new owner: the owner's personal expenses run through the company, one-time costs, and the like. On a listing they can raise earnings a great deal. A lender looks at them much more carefully, because the loan is sized to cash flow it believes will repeat.
The short answer. Lenders generally start from the business's tax returns and financial statements and accept adjustments they can verify and that will not recur under the new owner. Each lender applies its own credit judgment, so the same add-back may be accepted by one lender and questioned by another. Ask your lender how it treats each adjustment before you rely on it.
Add-backs that usually need the most support.
- Owner pay and perks. The seller's salary is often added back, but the lender will expect a fair wage for whoever runs the business after you buy it.
- One-time costs. A lawsuit, a move or a major repair. Expect to show why it will not happen again.
- Personal expenses. Vehicles, travel or family on the payroll. These need documents and a clear link to the owner, not the business.
- Pro forma changes. Savings or growth the seller expects but has not yet achieved. These tend to get the hardest look.
My view: go line by line. After 17 years on the sell side, the best preparation I know is to walk through which add-backs a lender and a QoE will actually accept, line by line. For each one ask: is it real, is it discretionary, and does it tie to the books? An add-back that clears all three is far stronger than a total on a summary page.
Why it matters for coverage. The earnings a lender accepts drive your debt service coverage. It is prudent to treat 1.25x as the floor, and for a new buyer, clearing that minimum is often necessary but may not be sufficient. If your deal clears coverage only with every add-back included, test it again without the weakest ones.
Try it on your own numbers.
- Add-back checker helps you sort each adjustment and test the earnings. Any adjustment you apply is yours to set from your own research.
- What can I afford to pay? works backward from SBA terms and your target coverage to the most a business can support.
These tools are for analysis and education, not a buy or pass signal.
Frequently asked questions
Do SBA lenders accept seller add-backs?
Often, when the adjustment can be verified and will not recur under the new owner. Each lender applies its own judgment, so confirm with yours.
Which add-backs do lenders question most?
Owner pay without a replacement wage, undocumented personal expenses and pro forma savings or growth that have not yet happened.
How do add-backs affect DSCR?
Accepted add-backs raise the cash flow used to measure coverage. I consider it prudent to treat 1.25x as the floor. For a new buyer, clearing it is often necessary but may not be sufficient.
Disclaimer. This page is educational only. It is not investment, legal, tax or lending advice, and it is not a substitute for full due diligence with your own lender, attorney and CPA. Every decision is yours.