EBITDA Adjustments in QoE: 40 Common Add-Backs

Quality of Earnings · Abhishek Bhandari · 2 September 2026

The adjustments that appear in most Quality of Earnings reports, grouped by category, with the evidence diligence teams expect and the ones buyers push back on.

Every Quality of Earnings report has the same schedule at its centre: reported EBITDA, a list of adjustments, adjusted EBITDA. The list is where the value of the work sits, because each line changes the price. This guide covers the adjustments that appear most often, what evidence supports each, and which ones a buyer’s advisor will challenge.

The convention throughout: an add-back increases EBITDA (a cost that should not recur), a deduction decreases it (income that should not recur, or a cost that is missing).

Non-recurring items

These are the adjustments management proposes first and buyers scrutinise hardest. The test is not whether an item is unusual but whether it will recur in the buyer’s ownership.

1. Legal settlements and litigation costs. Add-back if the matter is closed. Evidence: settlement agreement, legal invoices, confirmation no related matters are open.
2. Restructuring and redundancy costs. Add-back for completed programmes. Evidence: board approval, severance schedules, headcount before and after.
3. Transaction costs relating to the current sale process. Add-back. Evidence: advisor invoices coded to the deal.
4. Costs of an aborted acquisition or disposal. Add-back. Evidence: invoices and correspondence.
5. One-off consulting projects (ERP implementation, strategy review). Add-back only if genuinely non-recurring; a company that runs a “one-off” project every year has a recurring cost.
6. Bad debt write-offs above the normal run-rate. Partial add-back to the historical average.
7. Inventory write-downs from an identifiable event. Add-back; recurring obsolescence is not.
8. Insurance recoveries. Deduction when the recovery sits in other income.
9. Gains and losses on asset disposals. Deduction of gains, add-back of losses.
10. Grant and subsidy income that has ended. Deduction.
11. Storm, flood or fire damage costs net of insurance. Add-back.
12. Start-up losses of a discontinued site or product line. Add-back with care; the buyer will ask why the losses were incurred.

Owner and related-party adjustments

Standard in owner-managed and founder-led businesses.

13. Owner compensation above or below market. Adjust to a market rate for the role. Evidence: benchmark data, job description.
14. Family members on payroll who do not perform a role. Add-back.
15. Personal expenses through the business (vehicles, travel, club memberships). Add-back. Evidence: expense ledger review.
16. Below-market rent paid to an owner-controlled property company. Deduction to market rent.
17. Above-market rent to a related party. Add-back to market.
18. Related-party sales or purchases on non-arm’s-length terms. Adjust to market.
19. Management fees paid to a parent or holding company that the buyer will not incur. Add-back.
20. Directors’ fees and pension contributions that will change post-deal. Adjust to the expected structure.

Run-rate and pro forma adjustments

These reflect the business as it will be, not as it was. Buyers accept them when the change is contracted and started.

21. Annualisation of new contracts signed and generating revenue in the last quarter. Pro forma; requires signed contracts and invoicing evidence.
22. Lost customers. Deduction of the full-year contribution of customers who have given notice.
23. Price increases implemented but not yet in a full year of results. Pro forma with signed price notifications.
24. Cost savings from actions taken (a closed site, a renegotiated supply contract). Pro forma if the action is complete; if planned, it is a forecast item, not an adjustment.
25. New hires made to support growth whose full-year cost is not yet in the numbers. Deduction.
26. Standalone costs the target will incur once separated from a group (IT, HR, finance, insurance). Deduction. Carve-outs live or die on this line.
27. Public-company or PE-ownership costs the buyer will add (audit, reporting, board). Deduction.

Accounting policy and cut-off adjustments

Less visible, often larger than the headline non-recurring items.

28. Revenue recognition timing, especially on long-term contracts, subscriptions and bill-and-hold arrangements. Adjust to the appropriate period.
29. Capitalised costs that should have been expensed (development, software, repairs). Deduction.
30. Expensed items that meet capitalisation criteria. Add-back, rarely proposed by the seller.
31. Provision releases boosting reported profit. Deduction.
32. Under-provisioning for warranty, returns or bad debt. Deduction.
33. Inventory costing changes (FIFO to weighted average, overhead absorption changes). Normalise to a consistent policy.
34. Bonus accruals missing or reversed at year-end. Deduction to a normal bonus cost.
35. Cut-off errors on purchases or sales around period end. Adjust.
36. Lease accounting differences (IFRS 16 versus local GAAP) that move rent between EBITDA and depreciation. Present consistently with the buyer’s basis.

Items that are debated rather than agreed

37. Share-based compensation. Sellers add it back as non-cash; buyers who will need to replace it with cash compensation disagree.
38. Foreign exchange gains and losses in operating costs. Depends on whether the exposure is structural.
39. Research and development expensed in one period and capitalised in another. The argument is about which policy reflects the economics.
40. “Normalised” marketing spend where management cut spend before the sale. Buyers deduct to the historical rate.

How a diligence team evidences each line

An adjustment without evidence is an opinion. On a well-run engagement each line in the schedule carries:

• The account and period it comes from, with a reference to the general ledger or trial balance.
• The document that supports it (invoice, contract, board minute, settlement).
• Management’s explanation, recorded verbatim in the management questions log.
• The diligence team’s view: accepted, rejected, or accepted at a different amount, with the reason.

The schedule then shows three columns of EBITDA: reported, management adjusted, and diligence adjusted. The gap between the second and third is the negotiation.

Finding candidates faster

The slow part of QoE work is not judging the adjustments; it is finding them in twelve months of ledger detail. Spikes, sign flips, round numbers, accounts that appear in one period only, and postings from the finance director rather than the ledger clerk are all signals. ZAF Tools’ Find Adjustments scans any sheet for these patterns and lists candidates with the reason and the cell reference, so the team starts from a ranked list instead of a blank one. How it works.

For the schedule itself, the Quality of Earnings adjustments template has the three-column layout and a log with the evidence fields above.