Depreciation as add back

July 18, 2025

by a searcher from Hult International Business School in Cincinnati, OH, USA

Why is depreciation included as an add back? What are the pros and cons from both the buyer's and seller's perspective?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Great question. Depreciation represents a non-cash expense. It is typically generated from a one-time capital expense or potentially on-going capital expenses that could not be all written off within the year when it was incurred so it gets spread out over multiple years. As it is a non-cash expense buyers and lenders generally add it back to cash flow. However, merely adding it back to cash flow is not all you have to do. You also need to look at how much the company has historically spent on fixed assets. If the business is CAPEX heavy and will have on-going CAPEX needs, then you need to make an adjustment to the adjusted EBITDA or adjusted SDE to account for the future CAPEX needs of the business. Sometimes this future need will be less than historical depreciation (this usually happens if the company spent a bunch of money one-time), sometimes they will match up, and on a rare occasion the future CAPEX need might exceed historical depreciation (example would be a company that has fully depreciated out their equipment but their equipment is aged and needs to be replaced). So adding back depreciation is important, but you also need to make the adjustment for future CAPEX to fully account for the adjusted EBITDA or adjusted SDE. If you have additional questions on this or any other cash flow related questions, you can reach me here or directly at redacted

Reply by a searcher
from Columbia University in Fairfax, VA, USA

^redacted‌ is spot on. The only broader point I'd add is that most Search Fund deals are structured as Asset Purchases (rather than Stock Purchases) - and that means three things typically reset under new ownership post-close: 1) Interest Expense (because the new owner usually takes on new debt) 2) Taxes (because your tax structure, deductions, and treatment will likely differ from the seller’s) 3) Depreciation & Amortization (because the asset basis steps up, creating a new D&A schedule) This is why these items are added back to Net Income when calculating EBITDA. They won’t carry over post-sale and aren’t reflective of future operating cash flow. From there, you'll incorporate those numbers based on how they'll look under your ownership in the pro forma adjustments.

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