An add-back is an expense on a target company's income statement — an owner's above-market salary, a personal cost run through the business, or a genuinely one-time charge — that a buyer adds back to reported earnings to estimate what the business would actually earn under new, arm's-length ownership before a valuation multiple is applied.
Add-backs feed directly into seller’s discretionary earnings, the earnings base Canadian small-business valuation practice runs on. Deavo’s own definition states plainly that SDE is “the business’s pre-tax profit plus the owner’s salary, perks, interest, depreciation and one-time costs” — each of those items is itself an add-back category. The same source publishes illustrative median SDE multiples by sector — 2.1× for restaurants, 2.4× retail, 2.9× trades and services, 3.0× health and wellness, 3.2× professional services, 3.6× manufacturing — explicitly framed as “illustrative medians for research context only … not an appraisal.” No Canadian regulator or industry body publishes an authoritative list of which specific expenses qualify as an add-back; it is negotiated deal by deal, and the multiple is only as reliable as the underlying earnings figure it is applied to.
The discipline that separates a legitimate add-back from an inflated one is simple to state and easy to get wrong in practice: the cost has to be genuinely one-time, personal, or above what an arm’s-length replacement would actually cost the business going forward. A market-rate general manager salary the buyer will still have to pay after closing is not an add-back, even if the departing owner was drawing that exact figure — folding it back into earnings inflates the multiple base with a cost that does not disappear. The inverse discipline — maintenance capital expenditure that a buyer must keep funding regardless of who owns the business — is the standard check against an over-aggressive add-back schedule; see maintenance capital expenditure.
A target’s income statement shows $410,000 of pre-tax profit. Diligence identifies $85,000 of owner salary above what a market-rate general manager would cost the business, a $22,000 one-time legal settlement, $14,000 of the owner’s personal vehicle lease run through the company, and a $9,000 non-recurring software migration. The buyer’s add-back schedule totals $410,000 + $85,000 + $22,000 + $14,000 + $9,000 = $540,000 of normalized SDE, the base a sector multiple is applied to — but only because each of those four items is genuinely one-time, personal, or above-market. A retiring allowance paid to a departing owner at closing is the same kind of one-time item and gets the same scrutiny before it is added back.
See also: Retiring allowance · Maintenance capital expenditure · Purchase price allocation.
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