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Add-back
Also called addback, cash flow adjustment, EBITDA adjustment.
An expense put back into reported profit because the lender accepts it is not a real recurring cash cost — the bridge between a tax return written to minimise income and a cash flow figure that predicts repayment.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
A tax return is prepared to make profit small. A credit file needs to know how much cash the business actually throws off. Add-backs are how one becomes the other, and the size of the loan you get is largely decided in that adjustment.
The standard list
- Depreciation and amortisation. Non-cash, added back without argument.
- Interest on debt being refinanced, because it disappears when the new facility replaces the old.
- One-time or non-recurring items: a legal settlement, a flood, a start-up cost that will not repeat.
- Owner's compensation above or below a market salary for the role.
- Documented personal expenses run through the business: vehicles, phones, travel, a family member on payroll who does not work there.
- Above-market rent paid to a related party that owns the building.
- Non-cash charges such as a bad debt write-off or an inventory adjustment.
Where the disagreement happens
Which add-backs an underwriter accepts, and on what evidence. Depreciation is automatic. Personal expenses require documentation and are routinely haircut or refused outright. An item described as one-time that appears in three consecutive years stops being one-time. Some lenders will add back nothing they cannot tie to a specific line on a filed return, which rules out most of the interesting ones.
Where you meet it
On the lender's cash flow worksheet — which you rarely see — feeding the numerator of the debt service coverage ratio. On an acquisition, it is the entire basis of the seller's discretionary earnings figure in the offering memorandum.
Where this one catches people
Add-backs are the number the seller's broker uses and the number the credit committee cuts. On a business acquisition, the adjusted EBITDA in the marketing pack is the seller's best case; the buyer's lender rebuilds it independently and usually lands lower. A lower figure means a smaller loan, which means a larger equity injection from you, and it frequently arrives after you have signed a purchase agreement.
Get the lender's own cash flow worksheet early, on the actual returns, before you commit to a price.
The second trap runs the other way. An owner's compensation adjustment is not automatically an add-back. If the seller paid himself 40,000 to run a business that will need a 140,000 general manager once he leaves, a competent underwriter deducts 100,000 rather than adding anything back — and the same logic applies to family members working below market and to deferred maintenance the seller stopped doing.
Worked through
Illustrative. The filed return shows net income of 92,000.
The underwriter adds back depreciation 61,000, interest of 28,000 on a loan being refinanced, a one-time legal settlement of 15,000, and 9,000 of documented owner vehicle expense. That takes the figure to 205,000.
Then it makes two adjustments the seller's broker did not. It deducts 35,000 for a market salary, because the owner draws nothing and a replacement manager must be paid. And it refuses the 15,000 settlement, because a similar item appeared in the prior year.
Adjusted cash flow: 205,000 − 35,000 − 15,000 = 155,000.
Annual debt service on the proposed structure is 118,000. Coverage is 155,000 ÷ 118,000 = 1.31, which clears a 1.25 minimum. On the broker's 205,000 the ratio would have looked like 1.74 and supported a much larger loan. On the unadjusted 92,000 it would have been 0.78 and failed outright. One business, three answers, and only one of them funds.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
Where you will meet this term
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Add-back — common questions
What does add-back mean?
An expense put back into reported profit because the lender accepts it is not a real recurring cash cost — the bridge between a tax return written to minimise income and a cash flow figure that predicts repayment.
Where does add-back catch people out?
Add-backs are the number the seller's broker uses and the number the credit committee cuts. On a business acquisition, the adjusted EBITDA in the marketing pack is the seller's best case; the buyer's lender rebuilds it independently and usually lands lower. A lower figure means a smaller loan, which means a larger equity injection from you, and it frequently arrives after you have signed a purchase agreement.
Is add-back the same as an interest rate?
Add-back is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does add-back apply to?
Term Loan, Business Line of Credit, SBA Loan, Asset-Based Lending.
Is there a worked example of add-back?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside add-back?
Cash flow, Debt schedule, Debt service, Debt service coverage ratio, EBITDA.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.