SBA loan add-backs explained

Deal structure

Begin with reported historical earnings

Acquisition cash flow normally starts with historical tax returns and financial statements. Seller’s Discretionary Earnings or EBITDA may then be adjusted for expenses that are personal, discretionary, nonrecurring, or replaced after the transaction.

The seller’s marketing schedule is not the final underwriting calculation. A lender will decide which adjustments are supported and whether the resulting cash flow is recurring.

Deal structure

A defensible add-back needs evidence

An acceptable adjustment should identify the exact expense, where it appears in the records, why it will not continue, and what documentation supports that conclusion. Bank statements, general-ledger detail, invoices, payroll records, and tax returns may all matter.

Vague categories such as miscellaneous owner expenses, projected savings, or expected revenue growth are not equivalent to documented historical add-backs.

Deal structure

Avoid double counting

Owner compensation, depreciation, interest, and one-time costs can be counted twice when a broker schedule mixes SDE and EBITDA conventions. Normalize the calculation once, then reconcile it to the source statements.

Replacement compensation must also be considered. An expense may be discretionary for the seller but necessary for a buyer who cannot perform the same work.

Deal structure

Stress-test the lender case

Run DSCR using a conservative lender case, not only the seller’s headline SDE. Remove questionable adjustments, include all acquisition debt, and test the transaction at the actual proposed rate and term.

If the deal works only when every disputed add-back is accepted, resolve the evidence before the LOI or renegotiate the price and structure.

Primary sources

• U.S. Small Business Administration — SOP 50 10
• Internal Revenue Service — Form 1120-S

Educational planning guidance only. This is not legal, tax, or financial advice; a loan approval, preapproval, or commitment to lend; or a guarantee of SBA eligibility or financing. See the editorial and corrections policy.