Profit Verification for Buyers: Owner Add-Back Analysis

What You’ll Learn in This Video

What addbacks really are and why sellers use them
The buyer’s dilemma when reviewing adjusted earnings
How personal expenses distort true cash flow
Which addbacks are legitimate vs. dangerous
How addbacks directly impact purchase price
Why invalid addbacks can kill SBA-backed deals
A real-world example showing a $500K overpayment
Why This Strategy Works for Any Business

Addback analysis works across every industry because it focuses on one core truth:
If the business needs the expense to operate under new ownership, it is not an addback.

This approach helps buyers:

Avoid overpaying based on inflated earnings
Stress-test SBA loan viability
Identify aggressive or misleading seller behavior
Build leverage during LOI and diligence
Protect long-term cash flow and debt coverage

Timestamps

0:00 – The Buyer’s Dilemma Explained
0:43 – What Addbacks Really Are
3:07 – How Addbacks Affect Valuation
5:24 – Why Addbacks Must Be Validated
9:35 – Common Types of Addbacks
12:31 – The Non-Recurring Gray Area
18:27 – The Golden Rule of Addbacks
21:22 – How to Push Back on Sellers
29:36 – Real Deal Example Breakdown
39:48 – How Buyers Overpay by $500K
42:26 – SBA Risk and Final Takeaways

Step-by-Step Breakdown
Step 1: Separate Personal vs. Business Expenses
Start by isolating what is truly required to operate the business versus personal or discretionary spending recorded on the P&L.
Focus on payroll, cost of goods, and ongoing operating costs.

Step 2: Validate Every Addback
Every addback must be supported with:
General ledger detail
Clear descriptions
Invoices or documentation
If it cannot be validated, it should not be included in valuation.

Step 3: Apply the Multiple Reality Check

Remember:
Every dollar of addbacks is multiplied by the valuation multiple.

Invalidating $25,000 of addbacks at a 4x multiple reduces purchase price by $100,000.

Final Thoughts & Call-to-Action

Addbacks should reveal the true earnings potential of a business, not inflate it.

Aggressive, unsupported addbacks destroy trust and kill deals during diligence.

This Session is a part of the 2025 Business Acquisition Webinar Series. Hosted by Patrick of O'Connell Advisory Group

👍 Like this video if you found it helpful
• Subscribe to Brick by Brick: https://blog.oconnelladvisorygroup.co...
• A blog helping entrepreneurs and investors build wealth through ownership.

🔗 Are you an Entrepreneur or Investor looking for help with Financial Due Diligence?
• Learn how I can help: https://tinyurl.com/5997x6u5

🔗 Learn more about our Business Buying Program
• Apply today: https://tinyurl.com/yc4wsst8

📚Stop Climbing. Start Owning. Escape the 9-5.
• Grab a copy of my e-book today: https://stan.store/SMBDealGuy/p/get-m...

👽Join the SMBAcqusiitonHub on Redditt
• A community of over 100 entrepreneurs to help you Confidently Buy, Sell, and Operate Profitable Small Businesses.
Join here:   / smbacquisitionhub  


Patrick's Affiliate Recommendations:
• Time Tracking Software: https://appsumo.8odi.net/POm6BN
• Kit: https://partners.kit.com/3ke2jpnjwcqt
• #1 Personal Finance App: https://www.wealthfront.com/c/affilia...
• Grow your business through authentic reviews (15% off for 12 months) : https://refer.testimonial.to/patrick-...


------Patrick O'Connell––– Social Media–––
LinkedIn:   / patrick-o-connell-3b235177  
X: https://x.com/smbdealguy
TikTok:   / smbdealguy  
Instagram:   / smbdealguy  
YouTube:    / @patrick_oconnell