Seller add-backs: how to check a business's real profit before you buy

When you look at a business for sale, the number that matters most usually isn’t the profit in the tax return. It’s the “adjusted” or “normalised” profit the seller or broker presents: the tax-return figure with certain expenses added back. That adjusted number often sets the asking price, and it will shape how much you can sensibly borrow. So it’s worth testing every line.

What are add-backs and why do sellers use them?

Small business accounts are prepared for tax, not for a buyer. Owners legitimately run some costs through the business that a new owner wouldn’t have, and some years carry one-off costs that distort the picture. Add-backs adjust for that.

Business.gov.au’s guide to selling a business notes that one common valuation approach uses net profit to work out value, and that information given to buyers must be accurate and true. Adjusted profit is how many sellers present that net profit in its best light. Your job is to check the light is fair.

Which add-backs are usually fair?

Add-back	Usually fair if…	Evidence to ask for
One-off legal or professional fees	It really was a single matter	Invoices, explanation
A one-time major repair	It won’t recur soon	Invoice; asset condition report
Personal expenses run through the business	Clearly personal and won’t continue	Ledger detail
Interest on the seller’s own loans	The debt doesn’t transfer to you	Loan statements
Depreciation (in some calculations)	You’ve separately budgeted for replacing assets	Asset register

Which add-backs deserve a hard look?

• The owner’s wage. The most common and most contentious. If the seller works 50 hours a week and adds back their entire pay, ask: who does that work after settlement? If it’s you, that’s your wage. If it’s a manager, it’s a real cost. A fair adjustment replaces the owner’s draw with a market wage for the role.
• Family labour. A partner or child working unpaid or underpaid. You’ll likely need to pay someone properly.
• Related-party rent. If the seller owns the premises and charges low rent, check what the new lease will cost.
• “One-off” costs that happen every year. If repairs appear in three years running, they’re a recurring cost.
• Removed marketing. If spending was cut to boost profit before sale, revenue may fall when you restart it or don’t.
• Lost or departing customers. Not an add-back, but check whether major customers are staying.

If you’re already weighing a particular business and want to know what’s fundable, tell us the asking price and the adjusted profit. A specialist can sense-check the numbers against what a lender will look at.

Step by step: rebuilding the profit yourself

Business.gov.au’s guide to buying an existing business recommends reviewing the previous three to five years of tax returns, BAS, receivables and payables, balance sheets, profit and loss statements, cash flow statements and sales records, and verifying the information independently. With those in hand:

1. Start from the profit and loss in the tax return for each year.
2. Check revenue against BAS and bank statements. They should broadly agree.
3. List every add-back the seller proposes, with the amount and their reason.
4. Ask for evidence for each one.
5. Accept, adjust or reject each add-back based on that evidence.
6. Replace the owner’s labour with a realistic wage for whoever will do the work.
7. Add the costs you’ll have that the seller doesn’t: new lease terms, a manager, insurance, your loan repayments.
8. Look at the trend. Three rising years tell a different story from one strong year after two weak ones.

The ATO’s small business benchmarks let you compare a business’s cost ratios with similar businesses in its industry. A business far outside the benchmarks deserves questions.

A worked example

Illustrative only. Made-up figures to show the method.

A café is listed with an “adjusted profit” of $180,000. The tax return shows $95,000. The seller’s add-backs:

Add-back	Seller’s figure	After testing
Owner’s wage	$60,000	Rejected: the work still has to be done, by the buyer or a paid manager
One-off coffee machine repair	$8,000	Accepted, with invoice
Owner’s car	$12,000	Partly accepted: $6,000 personal use
Partner’s unpaid weekend shifts	$0 shown	Added cost: $25,000 to staff those shifts
Legal fees for lease dispute	$5,000	Accepted, one-off

Rebuilt profit: $95,000 + $8,000 + $6,000 + $5,000 − $25,000 = $89,000, and that’s before paying anyone to do the owner’s job. If the buyer hires a manager instead of working there, most of that disappears. If the buyer works full time in the café and takes no separate wage, the business earns around $89,000 for that work. That’s a very different business from one earning $180,000, and a very different price and loan.

How does adjusted profit affect your borrowing?

Lenders look at whether the business can comfortably cover repayments. If the price and the loan are built on an inflated profit, repayments may be too heavy for the real earnings. That’s how buyers end up owning a business that pays the bank but not them.

So:

• Base your repayment plan on the rebuilt profit, not the seller’s.
• Leave a buffer for a slower first year as customers adjust to new ownership.
• Consider vendor finance. A seller confident in their numbers should be willing to carry part of the price.
• Choose a structure and term to match. Most small business acquisitions are repaid over several years. Our verdict on the best way to finance buying a business compares the options, and secured versus unsecured explains why property security usually plays a role when goodwill is a big share of the price.

If you’ll use property, see the best loan when you own property and our second mortgage verdict.

What questions should you ask the seller?

• Can you show me the evidence for each add-back?
• How many hours a week do you work, and doing what?
• Who else works in the business, paid or unpaid?
• What will the lease cost me, and for how long?
• Which customers account for the largest share of sales, and are they staying?
• Would you consider vendor finance for part of the price?

What red flags should make you slow down?

• Cash sales the seller says aren’t in the books. If income isn’t recorded, you can’t verify it, and a lender won’t count it.
• A big jump in profit in the year before sale. It may be real, or it may reflect cut spending that can’t last.
• Reluctance to share records. A seller confident in the numbers usually shares them readily.
• Heavy reliance on one customer or the owner’s personal relationships. If they leave with the seller, so does the profit.
• Unresolved tax debts or disputes. These can affect the business after you take over.

Any of these is a reason to dig deeper, get independent advice from an accountant and solicitor, and consider negotiating the price, the structure or a longer handover. None is automatically a deal-breaker, but each deserves an answer before you commit borrowed money to the purchase.

Who should help you check the numbers?

An accountant who works with small business acquisitions is worth their fee here. They can test add-backs, compare the figures with industry benchmarks, and flag tax issues. A solicitor should review the contract, the lease and any vendor finance terms.

Ready to make an offer on solid numbers?

Before you sign a contract, know what you can fund on the profit the business really makes. Start a short enquiry with the asking price, the tax-return profit, the seller’s adjusted figure and the security you have.

There’s no credit check when you first enquire, and your details aren’t circulated to a list of lenders. Share both versions of the profit; a specialist can tell you which one a lender is likely to rely on, and what that means for your offer.