One-time expense add-backs that do not hold up under buyer scrutiny

You’ve identified a cluster of one-time expenses in the seller’s last three years of P&Ls and added them back to calculate normalized EBITDA. The seller’s accountant provided documentation. Your spreadsheet looks clean. Then the buyer’s CPA questions every single line item, and suddenly your add-back narrative collapses. One-time expense add-backs are the easiest way to inflate normalized earnings—and the fastest way to lose credibility with a disciplined buyer. The difference between an add-back that holds up in a Quality of Earnings engagement and one that looks like wishful thinking comes down to whether the expense was truly non-recurring, whether it’s already priced into operations, and whether a buyer believes it won’t happen again.

The Core Problem: Recurrence vs. Non-Recurrence

Buyers operate from a simple principle: if the expense recurs in any meaningful way post-acquisition, it is not an add-back. The seller’s one-time framing doesn’t matter. What matters is whether the expense materially reappears in the buyer’s operating reality.

Start by asking: is this a true non-recurring event, or is it a recurring expense the seller chose to defer, batch, or label as non-recurring? The most dangerous add-backs conflate the two. A facility relocation that happened once in the period looks like a one-time event. But if the business relocates every five to seven years as part of normal growth, it’s recurring on a cycle—and the buyer will budget for it. Similarly, a large professional services engagement tagged as “one-time litigation defense” fails under scrutiny if the company has a track record of similar claims every two to three years.

The buyer’s due diligence will pull historical P&Ls going back as far as they can access—sometimes 7–10 years for larger deals. If the same “one-time” expense appears more than once in that window, the add-back is indefensible. Even if it hasn’t recurred in the last 24 months, if it appeared twice in the prior decade, buyers assume it’s cyclical.

Add-Backs That Consistently Fail Buyer Review

Executive recruitment and relocation costs

Sellers often claim the cost to hire a CFO or VP of Operations is non-recurring. Buyers immediately see through this. High-growth companies or businesses with turnover above 15% per year will reliably incur recruitment costs. Even stable businesses replace executives every five to ten years. A buyer acquiring a business must staff for the future, and they assume they will face similar hiring and onboarding costs. The add-back might reduce in the specific period the expense hit, but it doesn’t disappear in perpetuity. Resist the urge to add this back unless the hire was a genuine one-off replacement for an unusual event (e.g., founder retirement after 30 years with no planned succession).

Facility consolidation and move costs

A warehouse merge, office downsize, or plant relocation feels non-recurring. But operations evolve. Buyers know that every 5–7 years, growth or efficiency pressure triggers another move. They will not give you credit for the last one unless the business has genuinely reached its permanent footprint—and buyers are skeptical of that claim. Even then, the moving costs themselves (trucks, labor, temporary disruption) are usually operational expenses the buyer expects to manage at some point. Capitalizable costs (leasehold improvements in a new facility) are a different matter; those may belong on the balance sheet, not the P&L.

Insurance recoveries and legal settlements

A payout from a settled lawsuit or an insurance claim looks like a one-time benefit. But buyers treat these very differently depending on context. A one-time, unusual litigation loss (patent infringement suit by a supplier who has since gone under) is harder to defend as non-recurring. Conversely, if the business operates in an industry with regular product liability or employment claims, the buyer assumes more settlements will follow. They may even adjust downward the probability of future recoveries, since claims often take years to settle. Add-backs here only hold up if you can prove the underlying risk factor has been permanently removed (e.g., the company divested the product line that triggered all claims).

Software implementation and system migration costs

Upgrading from QuickBooks to an enterprise accounting system, migrating to a new CRM, or overhaul of manufacturing control systems: these are expensive, one-time projects. Wrong. A modern company replaces its core software stack every 3–5 years as systems mature, integrations break, and functionality becomes obsolete. The 2024 ERP migration will be followed by the 2028 cloud transition and the 2032 AI-enabled system refresh. Buyers absolutely expect to invest in technology on a recurring cadence. The only way an IT implementation add-back survives is if you can prove it was a forced emergency (a legacy system catastrophically failed and had to be replaced mid-year), and you have written evidence that the replacement system will meet needs for at least 10 years.

Severance and restructuring charges

Layoffs and severance are the most toxic add-backs in buyer review. Even if the company announced a one-time restructuring and executed it, buyers apply brutal logic: if the prior management thought headcount needed cutting, either the buyer will cut more, or the business was bloated and will face similar restructuring pressure. Severance is rarely credible as a non-recurring expense unless you have airtight evidence of a unique event—a division sold off, a product line discontin­ued, or a specific role eliminated because of automation that won’t repeat. Generic restructuring for “efficiency” looks like poor prior management, and the buyer won’t credit it back.

Add-Backs That May Survive Scrutiny

The inverse—add-backs with real staying power—share a few characteristics:

• The expense is driven by a specific, external, non-recurring event (a customer bankruptcy that triggered bad debt, a natural disaster, a tariff on a single supplier that was later removed).
• The risk factor has been permanently eliminated or is documented as unlikely to recur (the customer base diversified, the facility rebuilt to withstand future disasters, or a supplier contract was renegotiated).
• The expense does not appear in any historical P&L in the past 5–10 years and there is no operational reason it will appear again.
• A licensed CPA has signed off that the expense meets GAAP adjustment criteria and is documented in the seller’s working papers.

How Buyers Stress-Test Your Add-Backs

When a buyer’s CPA sits down to review your normalized EBITDA, they follow a predictable checklist. They will pull historical tax returns, bank statements, and P&Ls. They will ask the owner or CFO whether the expense is expected to recur. They will compare the add-back justification to industry benchmarks and the company’s historical spending patterns. They will challenge the categorization—is this really non-recurring, or is it a permanent part of operations the seller simply wishes wasn’t there?

The most effective sellers preempt this by running their own stress-test. Go back 10 years. List every expense you plan to add back. Now ask: does this expense category appear anywhere in the prior seven years? If yes, even once, you must reconcile that. You need to explain why that instance doesn’t count and why this one is genuinely non-recurring. If you can’t make a bulletproof case on paper, drop the add-back. It will cost you credibility far more than the EBITDA points will earn you.

The most defensible approach is to separate add-backs into two categories: (1) clear, documented non-recurring items with written proof of their one-time nature, and (2) questionable items you should disclose upfront with caveats and let the buyer decide. Transparency here builds trust. Aggressive add-backs that collapse under questioning erode confidence in your entire normalized EBITDA calculation and invite the buyer to discount everything.

A few concrete validation steps you can take before presenting any add-back: (1) Pull a minimum three-year P&L history and confirm the expense does not recur. (2) Obtain written support from the seller’s accountant or CFO stating the reason the expense was one-time and why it is unlikely to recur. (3) Cross-reference the add-back against industry operating metrics or peer benchmark data to confirm it’s truly unusual for the sector. (4) If available, review the company’s written budget or strategic plan to confirm management did not forecast a similar expense in the forward period. (5) Ask yourself whether the buyer’s CFO would buy this story in a phone call. If you hesitate, the add-back is weak.

Frequently Asked Questions

What’s the difference between a one-time add-back and a working capital adjustment?

A one-time add-back removes an unusual non-recurring expense from normalized EBITDA because it won’t repeat post-acquisition. A working capital adjustment is a separate cash settlement at close—it accounts for the difference between the seller’s target working capital (e.g., cash, receivables, and inventory) and the actual working capital transferred to the buyer. The two are independent. A one-time expense add-back affects EBITDA; working capital affects the cash paid at close.

Can we add back executive compensation if the new owner plans to reduce it?

Only if the prior compensation was abnormally high in a way that the buyer would acknowledge. If the owner paid himself $500K in a $2M revenue business that is acquired and the new buyer brings in a professional CEO at $150K, the buyer will not credit you back the $350K difference. The owner’s compensation is baked into the business valuation. If the owner’s salary was in the bottom 10th percentile for the role (an underpaid founder-operator), you might argue an adjustment to “fair market compensation,” but that’s an add-back to normalize, not to account for the buyer’s future decisions. Expect pushback.

If an add-back appears in the prior year but not the current year, is it recurring?

Not automatically, but it raises questions. A legal settlement from a 2023 case might not recur if the risk has been mitigated. But if the company incurred severance in 2023 and you want to add back a different severance charge in 2024, the buyer will call both non-recurring adjustments into question. Look at the underlying cause. If the two severances had different root causes and the 2023 trigger no longer exists, you may have a case. If they’re part of a pattern of regular pruning, don’t add them back.

Should we disclose add-backs we choose not to push for in the LOI?

Not usually in the LOI, but absolutely before the buyer’s CPA begins Quality of Earnings work. Your normalized EBITDA presentation should show both the baseline GAAP EBITDA and your proposed adjustments with clear footnotes. If you’ve omitted questionable add-backs to be conservative, that transparency is good discipline. It shows confidence in your numbers. If the buyer later finds add-backs you didn’t disclose, you lose negotiating credibility on price and terms.

Can we add back recurring annual costs like insurance or maintenance if the prior year spiked?

Only if the spike was genuinely abnormal and the return to trend is defensible. If insurance premiums rose 40% in one year due to a claims history issue that has now been resolved, you might normalize to the multi-year average with supporting documentation from the broker. But if the spike is just a standard rate increase every insurer experiences, that’s not an add-back—it’s normal inflation. Similarly, maintenance costs that ebb and flow with equipment age are operational; they’re not non-recurring just because they happened to be high one year.

This article is educational and does not constitute M&A, investment, or accounting advice — confirm findings with a licensed CPA or M&A advisor before making an offer.

This article is educational and does not constitute M&A, investment, or accounting advice — confirm findings with a licensed CPA or M&A advisor before making an offer.

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