Every CIM has a slide where the seller's broker turns a modest GAAP net income into a much larger "Adjusted SDE." That gap is entirely made of addbacks — and it's also where more deals get overpriced than almost anywhere else in the process.
Addbacks aren't inherently suspicious. A business genuinely earns more cash than its tax return shows when the owner pays themselves a below-market salary, runs a personal vehicle through the company, or takes a one-time legal bill that has nothing to do with ongoing operations. The problem isn't that addbacks exist — it's that "the seller said so" is not evidence, and by the time an unsupported addback unravels, you may be sixty days and a chunk of diligence budget into the deal.
Here's a category-by-category checklist to work through before you anchor an offer to an adjusted number.
Owner compensation
If you're buying to operate the business yourself, the seller's actual comp is close to irrelevant — you're either replacing it with your own labor or a manager's salary. If you're buying to run it passively, ask for a replacement-cost estimate for whatever the owner actually does, not just their W-2 number. A seller who "only pays himself $60,000" but personally runs sales, operations, and vendor relationships isn't handing you a $60,000 addback — they're handing you a job you'll need to fill.
Ask for: payroll records showing the owner's actual draws, plus a candid list of what they do day to day.
Personal expenses run through the business
Vehicle, travel, meals, cell phone, home office reimbursements — the classics. These are usually real, but "usually real" isn't the same as documented.
Ask for: the general ledger detail behind each line item, not just the summary total. A $40,000 "vehicle expense" addback should be traceable to actual invoices, not a single number pulled from a chart-of-accounts category.
One-time or non-recurring items
Legal settlements, a bad-debt write-off, storm damage, a one-off consulting engagement. These are legitimate addbacks if they're genuinely one-time.
Ask for: enough history — ideally three to five years — to confirm the item hasn't shown up before under a different label. A "one-time" legal fee that recurs every other year isn't one-time; it's a cost of doing business in that industry.
Related-party payments
Payments to family members, an LLC the owner also controls, or "consulting fees" to someone who shares a last name with the seller. These can be legitimate addbacks — or they can be disguised compensation for real work someone will need to keep doing after close.
Ask for: the org chart. If the "addback" is a family member who actually answers the phones, you're not eliminating a cost — you're eliminating an employee.
Distributions labeled as compensation
Distributions of profit aren't addbacks — they're just how an owner takes money out of a business they already own free and clear. If a line item labeled "salary" behaves like a distribution instead — irregular timing, round numbers, amounts that scale with profit rather than hours worked — dig into whether it's really compensation for labor or just profit-taking that happens to run through payroll.
The math sanity check
Before accepting a schedule of addbacks, add them up and compare the total to reported net income. If addbacks are pushing "adjusted" earnings to two or three times the GAAP figure, that's not automatically wrong — some genuinely under-optimized small businesses look exactly like that — but it's a signal to slow down and verify every line individually rather than accepting the total on faith.
None of this means walking away from every deal that has addbacks — nearly all of them do. It means treating each one as a claim that needs its own piece of evidence, not a single number to accept or reject wholesale. The seller's broker built a schedule to support their asking price; your job in diligence is to rebuild it from source documents and see if it still adds up.