Management Add-backs: Review and Argumentation

In every Financial Due Diligence, management presents a list of proposed add-backs to EBITDA. These adjustments are self-serving — they increase adjusted EBITDA and therefore the valuation management hopes to achieve. The FDD analyst's role is to review each one critically, accept those that are genuinely supportable, and reject or reduce those that are not.

What Is a Management Add-Back?

A management add-back is any item that management proposes to add back to (or subtract from) reported EBITDA to arrive at a higher adjusted EBITDA figure. These are presented in the information memorandum, the management presentation, or the VDD datapack.

The Review Process

Step 1: Obtain and Document the Full List

Request management's complete list of proposed adjustments with:

• A description of each item
• The period it relates to
• The quantum claimed
• The supporting documentation

Step 2: Test Each Item Against the Three-Part Test

An add-back is justified if:

1. The item is genuinely non-recurring (not expected to repeat)
2. The item is not part of the normal cost of running the business
3. The item is supported by adequate evidence

Apply this test consistently. Management often presents recurring costs as "exceptional" — the discipline is in saying no when the evidence does not support the claim.

Step 3: Review the Documentation

For each claimed add-back:

• Legal settlement: obtain the settlement agreement and verify the amount
• Restructuring: obtain board minutes approving the programme and the cost breakdown
• Consultant fees: obtain the invoice and verify it relates to a specific, non-recurring engagement
• COVID costs: obtain evidence of the specific incremental spend

Step 4: Consider the Pattern Across Years

Build a schedule showing all claimed adjustments across all reporting periods. Patterns are revealing:

• A "one-off" restructuring cost that appears every year is arguably a recurring operational cost
• Legal costs that appear every year in varying amounts are likely recurring
• A genuine one-off — say, an office relocation — should appear once and be specific

Common Add-backs That FDD Teams Reject

• "Strategic consulting" fees that appear annually and seem to substitute for internal management time
• ERP or IT implementation costs in a business that regularly upgrades its systems
• Excess staff costs around a growth initiative that is ongoing (not truly one-off)
• Bonus payments that management claims are non-recurring but appear every year
• Travel and entertainment costs classified as exceptional during COVID

How to Communicate Rejections

Rejecting management add-backs is a sensitive part of the job. The approach is:

• Be evidence-based: "We cannot accept this adjustment because [the item appears in all three years / the documentation does not support the full quantum / the engagement appears to be ongoing]"
• Offer a compromise where appropriate: "We accept €150k of the €300k claimed, based on the documented portion of the engagement"
• Be direct but professional in the management Q&A session

Conclusion

Management add-back review is where the FDD analyst must combine analytical rigour with professional courage. Accepting unsupported add-backs harms the buyer; rejecting legitimate ones reduces the quality of the QoE report. The skill is in drawing the line correctly.

The Transaction Services Interview Programme (€119.99, one-time) trains you to review and argue management add-backs with real case study examples and worked FDD challenges. Enrol today.