What are add-backs and normalised EBITDA?
The short answer
Add-backs are adjustments that restate reported profit into what the business genuinely earns for a new owner — removing the current owner’s personal expenses, restating their salary to a market wage, and stripping out one-off items. The result is normalised EBITDA, the figure a multiple is applied to.
Why reported profit is the wrong starting point
An owner-operated business is run for the owner’s benefit, not for a buyer’s. The owner may pay themselves below market and take profit as dividends, or above market to reduce tax. Personal vehicles, travel and phones sit in the accounts. The company may rent premises from a related trust at any rate the owner chose. None of that survives a sale.
The biggest add-back is usually not an add-back
It is a deduction. Where an owner draws $80,000 but performs a role a replacement manager would cost $180,000 to fill, normalised earnings fall by $100,000. Sellers frequently present only the additions; a valuation that does the same is not defensible, and any competent buyer will find it.
Every add-back needs evidence
A schedule of adjustments with ledger references and a reason for each is credible. A single line reading "owner benefits — $140,000" is not, and it damages the credibility of the genuine items alongside it. In litigation and ATO contexts, unevidenced add-backs are the first thing an opposing expert attacks.
One-off means once
A genuine one-off is a legal dispute settled, a flood, a single failed product launch. A "one-off" that appears in three consecutive years is a recurring cost with an optimistic label. The test is whether a new owner would incur it again, and it is applied to each item individually.
The numbers
Common add-backs and how they are treated
The direction matters as much as the amount. A normalisation schedule that only moves earnings upward has not been done properly.
Scroll the table sideways →
| Item | Direction | How it is assessed |
|---|---|---|
| Owner salary below market | Deduction | Costed at what a replacement would be paid for the same roles |
| Owner salary above market | Add-back | Restated down to a market wage for the role |
| Family members not working in the business | Add-back | Removed entirely where no work is performed |
| Related-party rent | Either | Brought to a market rent for equivalent premises |
| Personal vehicles, travel, phone | Add-back | Only the genuinely private portion, from the ledger |
| Genuine one-off legal or event costs | Add-back | Evidenced, and tested for recurrence across years |
| Capital items expensed as repairs | Add-back | Reclassified and depreciated properly |
| Missing provisions and entitlements | Deduction | Reinstated where the accounts have not recognised them |
Every adjustment in a report we sign is listed individually with the amount, the direction, the reason and the source. A bundled figure is not a normalisation schedule.
Caveats
How add-backs get a valuation rejected
Four failures we see repeatedly, all of them avoidable.
Who answered this
Prepared by the valuation team at Business Valuations Brisbane, the business valuation division of Asset Valuations Group. Every report we issue is signed by a Certified Practising Valuer of the Australian Valuers Institute. General information only — not advice on your specific circumstances.
- Add-backs with no source If the ledger detail is not there, the adjustment is an assertion. Buyers remove it and the credibility of the rest suffers.
- Only upward adjustments A schedule with no deductions signals advocacy rather than analysis, which is exactly the impression you do not want to give a reviewer.
- Recurring costs labelled one-off The three-year test settles most of these. If it appeared each year, it recurs.
- Owner labour not costed The single most common error in seller-prepared numbers, and the one that most inflates an asking price.
Reviewed by a Certified Practising Valuer
Reviewed by Jarrad Khoury, Director and Head of Valuations — Registered Valuer (QLD, Not Limited), Licensed Valuer (WA, Not Limited), CPV and CBV. Published by Business Valuations Brisbane, the business valuation division of Asset Valuations Group.
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