How to tell a real add-back from a fabricated one

We reviewed a platform acquisition last quarter where the seller presented an adjusted EBITDA figure several times what the business could actually show. Most of the headline number was adjustments — and most of those were cost savings the buyer had not yet made, in a business the buyer did not yet own. Underwrite off that number and you buy a company at a multiple of earnings it does not have, while borrowing against something that does not exist.

Add-backs are not fraud. Most of them are legitimate. The problem is that the word "adjusted" has no definition, no standard and no auditor, so it has quietly become the place where the entire negotiation happens before you arrive.

The four questions

Every single adjustment gets these four, in order. An add-back that fails any one of them comes out.

1. Can you show me the bank statement?

A real add-back is a cash expense that actually left the company and will not recur. That means it is traceable: a line in the general ledger, tied to an invoice, tied to a payment. If the seller's advisor cannot produce the trail on a specific adjustment, it is not an add-back. It is an assertion.

This question alone eliminates most of what is wrong on a typical CIM.

2. Is it genuinely non-recurring, or is it just irregular?

The legal fee for the lawsuit that settled is non-recurring. The legal fees that appear in four of the last five years, for different matters each time, are a cost of doing business in an industry that gets sued. Same with equipment repairs described as "one-time" — on an aging fleet, a major repair is not an event, it is a schedule.

Test: look back five years, not one. Anything that appears in three of them is an operating cost wearing a costume.

3. Is owner compensation normalized to market, or to zero?

This is the biggest single add-back in most lower-middle-market deals and it is almost always wrong. The seller adds back their entire W-2 plus distributions, as though the company will run itself once they leave.

It will not. Someone has to do the job. The correct adjustment is the difference between what the owner took and what it costs to hire a competent replacement in that market — plus payroll taxes and benefits. In a trucking company where the owner is also dispatching, selling and handling the top three customer relationships, that replacement is often two people, not one.

Normalizing to zero is not an accounting choice. It is a valuation increase in disguise.

4. Whose work product is this?

Projected synergies, planned cost reductions, "the new owner will not need the office lease," "insurance will reprice under a larger fleet policy" — these may all be true. They are also your value, created by your work after close, and you should not pay the seller a multiple for them.

Synergies belong in the buyer's business case. They never belong in the seller's price. A seller who insists otherwise is asking you to pay today for work you have not done yet.

The add-backs we see most in blue-collar deals

The number that matters

When you are done, you have a figure we call true SDE or true EBITDA: every questionable adjustment stripped, owner compensation normalized to market replacement cost, and maintenance capex recognized as the recurring obligation it is.

That is the number you put a multiple on. That is the number the debt has to service at 1.5x coverage. And that is the number you run the 20% drop test against — because if revenue falls a fifth the month after close, the adjusted figure on the cover page will not make payroll.

See how the full underwrite works, or send us a CIM and we will tell you what is wrong with it.