What add-backs are generally accepted for SDE calculations?

October 01, 2025

by a searcher from University of Louisville in St. Louis, MO, USA

What add-backs are generally accepted vs not for SDE calculations? Does anyone have a list? If people will pitch in here, I'll compile so we can create a search fund "standard" acceptable and unacceptable add-backs. A lot might be industry-dependent, but let's see what we can come up with.

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Reply by a professional
from Liberty University in Fort Myers, Florida, United States

Hey Jonathan, I can assist with this, since I spend all day every day reviewing addbacks and talking through them with sellers/brokers/buyers/banks/others. I have a few categories of addbacks outlined below, which will cover the vast majority of addbacks I have seen in the 250 Quality of Earnings reports I have completed: 1. EBITDA Adjustments: The standard EBITDA adjustments (interest expense/income, Income Taxes, Depreciation, and Amortization) should added back. The main issues I typically see with these addbacks relate to missing adding back interest expense (normally immaterial, but can be significant if the company owns a CD or of MMF). Also, it is important to only add back income taxes (sometimes this is missed as an addback, but also sometimes more than just income taxes are added back). It should not be payroll taxes, but only income taxes for the entity. 2. Owner compensation or benefits: Anything that the owner personally benefitted from that the new owner can also benefit from should be included here. Obvious ones are the W2 salary, health insurance, or similar items. Some items can be judgmental. I would argue the owner's personal cell phone can be added back, since that will not be an incremental costs to the buyer since they already have a cell phone plan. However, I do not include adding back vehicle expenses if the vehicle is used in the business, since the buyer will likely have incremental expenses by using their vehicle more. Again, very judgmental. I'd include any other personal or nonbusiness related items here (like paying for expenses for another business or something of that nature). 3. Error corrections: sometimes there are errors the broker, seller, accountant or others have found in the financial data, and there is an addback to correct this 4. One time/nonrecurring adjustments: If there was some one time income (like ERC income), then this is typically added back to get a clearer picture of operations for the business and what a buyer can expect going forward. The buyer will not want to pay extra money for the business if they are not going to be able to repeat the income reported by the company. Similarly, any gain/loss on a sale of fixed assets is generally recorded. 5. Smoothing adjustments: If there are any meaningful adjustments from a cash vs accrual standpoint, this may be something that needs to be adjusted to get a better picture of operations. 6. Market Value adjustments: If the space being rented by the business is with a related party, it is generally best to add back the rent expense, and then layer in the market rent expense. Or, if there are nonmarket staff (possibly family members), or other similar items, a market adjustment may want to be made. Those are the larger buckets I would categorize the acceptable addbacks into, but there are a wide variety of items I am sure you will come across as you continue in your search. There is a large list of errors you will come across as well. As a rule of thumb, if you are not able to find it on the P&L, it generally should not be added back. Also, you will not want to addback anything you will need post acquisition as well (like gas expense if you need to travel for the business, for example).

Reply by a professional
from Brigham Young University in Calgary, AB, Canada

Great list here, only item I would add is accounting methodology adjustments. Typically related moving items from cash to accrual, but in the lower middle market and below the quality of accounting can vary significantly and what get's booked to an account should actually be booked elsewhere.

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