Addbacks refer to adjustments made to the net income or net operating profit of a business when calculating its value as a going concern. These adjustments are made to account for certain expenses or income that may not be considered representative of the ongoing operations of the business. Addbacks are typically used in income-based valuation methods, such as discounted cash flow analysis or capitalization of earnings, to arrive at an adjusted net income figure, also known as the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
Common examples of addbacks in going concern valuation include:
- Depreciation and amortization expenses
- Interest expenses on debt financing
- Non-recurring or one-time expenses
- Owner-specific expenses
- Personal expenses
- Excessive expenses
- Income reversals
- Temporary and short-term revenue items such as government subsidies.
By adjusting for these items, the resulting EBITDA figure provides a more accurate representation of the business's ongoing profitability, which is then used to calculate its market value as a going concern.