How can I verify a seller's add-backs before buying a business?

An add-back is a claim, not a fact. Each one says a cost in the accounts will not exist for the new owner. Verification means asking for the evidence that makes that true, item by item.

Work from documents, not from the broker's schedule. The schedule tells you what is claimed. The general ledger, payroll records, bank statements, invoices, tax returns and the lease tell you what happened.

Sort each adjustment into one of three groups

Usually supportable, with evidence. Owner compensation above market, where payroll records show what was actually paid and you can price a replacement. A one-time legal or professional cost, where the invoice shows the matter and the matter is closed. Personal expenses run through the business, where the ledger detail identifies them individually. Rent paid to an entity the seller owns, where the lease and a market rent comparison show the gap.

Conditional. Owner compensation when you will run the business yourself, because the add-back only holds if you genuinely replace that labor for free. Family members on payroll, which depends on whether the work was real and whether you will need someone to do it. Vehicle costs, where the question is whether the vehicle serves the business. Deferred maintenance, which is not a saving so much as a bill arriving later.

Usually rejected. Costs described as one-time that appear in more than one year. Adjustments with no supporting document. Add-backs that double count, such as removing owner salary and owner health insurance and an owner draw that was really the same money. Discretionary spending that keeps revenue where it is, like advertising.

The tests that catch most of it

Look across years. An expense called exceptional that appears in two or three consecutive years is a recurring cost.

Price the replacement. If the owner works full time and takes $60,000, adding back the whole $60,000 while the market rate for that role is $95,000 does not produce a buyer's earnings figure. It produces a number that is $95,000 optimistic.

Trace to source. Each material add-back should land on a specific invoice, payroll entry or bank transaction. Where it does not, the adjustment is an assertion.

Check what SBA's own rules call for. For acquisitions at or above a $3 million business purchase price, SOP 50 10 8.1 requires the lender's quality of earnings report to document add-backs across non-recurring items, above or below market owner compensation, related-party transactions, deferred maintenance, and cash-versus-accrual differences. That list is a reasonable checklist for a smaller deal too.

Why the arithmetic matters

Adjusted earnings drive the price through the multiple, and they drive the loan through the coverage test. On a business valued at three times earnings, an $80,000 add-back that does not survive verification is $240,000 of value. The same $80,000 also reduces the debt the business can carry.

Considering a business purchase? BankableDeal can help review the earnings, add backs, and working capital behind the deal.