15 EBITDA Add-Backs PE Firms Will Actually Accept (The 2026 QofE Guide)

The "Adjusted EBITDA" Party is Over

In 2021, you could hand a prospective buyer a CIM (Confidential Information Memorandum) with a 50% EBITDA bridge, claiming that "future synergies" and "CEO distraction" were valid adjustments. The market was frothy, debt was cheap, and diligence was loose. Those days are dead.

In 2026, the Quality of Earnings (QofE) report is where deals go to die. Lenders have tightened covenants, and investment committees are scrutinizing every dollar of "pro forma" profit. According to S&P Global Ratings, aggressive add-backs remain elevated—averaging 29.4% of management-adjusted EBITDA—but the rejection rate during diligence has skyrocketed. For B-rated companies, aggressive add-backs led to a leverage miss of 2.6 turns higher than projected.

For Operating Partners and CFOs, this creates a binary outcome: present defensible, data-backed adjustments and get full credit, or present "fluff" and lose credibility instantly. Once a buyer finds two or three indefensible add-backs, they assume the entire P&L is manipulated. The multiple compresses, or worse, the deal trades.

We have audited hundreds of EBITDA bridges. Below is the diagnostic list of 15 add-backs that sophisticated PE firms will actually accept—and the documentation you need to prove them.

The Definitive List of Defensible Add-Backs

Tier 1: The "Slam Dunks" (Hard to Argue)

These are adjustments based on factual mispricing of market roles or non-business expenses. If documented, they clear QofE 95% of the time.

• 1. Excess Owner Compensation: The difference between the Founder’s $800k salary and the $350k cost to hire a professional CEO. Requirement: Compensation benchmarks (e.g., radical candor on market rates).
• 2. Personal & Lifestyle Expenses: Country club memberships, personal vehicles, family travel, and "consulting fees" paid to non-working spouses. Requirement: GL detail showing these expenses are 100% non-operational.
• 3. Transaction-Related Professional Fees: Legal, accounting, and investment banking fees specifically tied to the sale process or a previous aborted M&A attempt. Requirement: Vendor invoices clearly labeled "Transaction Services."
• 4. Related-Party Rent Adjustments: If the OpCo pays the PropCo (owned by the founder) $50k/month for a warehouse that markets for $30k/month. Requirement: A third-party commercial real estate appraisal.
• 5. Stock-Based Compensation (SBC): Non-cash equity grants. While GAAP treats this as an expense, PE views it as a non-cash item that gets wiped out post-close. Requirement: Cap table and grant letters.

Tier 2: The "Operational One-Timers" (Requires Proof)

These are valid but attract scrutiny. You must prove they are truly non-recurring.

• 6. Discontinued Operations: Losses associated with a product line or division you have formally shut down. Requirement: Board minutes approving the shutdown and financial statements isolating the division.
• 7. Severance & Recruiting Fees: Costs for one-time RIFs (Reductions in Force) or executive search fees for roles that are not high-turnover. Warning: If you have "one-time" severance every year, it’s an operating expense.
• 8. ERP & Systems Implementation: External costs (consultants, implementation fees) for installing NetSuite or Salesforce. Internal labor is rarely accepted.
• 9. Dual-Running Costs: Paying for two rent expenses during a move, or two software licenses during a migration. Requirement: Contracts showing the overlap period and the termination of the old cost.
• 10. Disaster Recovery: Costs related to "Acts of God" (floods, fires, cyberattacks) that are covered by insurance but had a deductible or uncovered portion.

Tier 3: The "Synergy" Danger Zone (High Rejection Risk)

Use these sparingly. Buyers will often cap these or require an earn-out to pay for them.

• 11. Executed Cost Reductions (Run-Rate): You fired 10 people last month. You can add back their salaries for the 11 months they were on payroll. Requirement: Termination letters and the absence of backfill requisitions.
• 12. New Contract Run-Rate Adjustment: You signed a $2M ARR contract in December. You can pro-forma the revenue for the full year. Requirement: Signed contract and proof of go-live.
• 13. Non-Recurring Board Expenses: If the buyer will replace the Board of Directors, historical board fees and travel can be added back.
• 14. Litigation Settlements: Payouts for one-time lawsuits (e.g., patent troll). Warning: If you are constantly being sued for HR issues, this is a cultural risk, not an add-back.
• 15. Inventory/Asset Write-Downs: A one-time clean-up of obsolete inventory. Requirement: Proof that policy has changed to prevent recurrence.

Execution: How to Present the Bridge

The difference between a 7x and a 10x exit often comes down to the credibility of your EBITDA bridge. When preparing your Revenue Quality Audit, follow the "Receipts Rule." If you cannot produce a third-party document (invoice, contract, board resolution) validating the adjustment, leave it off.

The "Fake EBITDA" Discount

Buyers are now applying a discount rate to the add-back schedule. If your add-backs constitute more than 20% of your total Adjusted EBITDA, expect a "haircut" on valuation. For example, if you claim $2M in add-backs on $10M EBITDA, a buyer might only underwrite 50% of those adjustments, effectively valuing you at $9M EBITDA. This is why calculating real EBITDA add-backs is critical before you go to market.

Actionable Next Steps

If you are 12 months out from an exit, start "cleaning the books" now. Stop running personal expenses through the business. Standardize your rent. Execute your RIFs early so the savings are in the TTM (Trailing Twelve Months) rather than a pro-forma adjustment. As outlined in our PE Exit Readiness Checklist, clean financials command a premium because they lower the buyer's perceived risk.

Ultimately, PE firms will accept add-backs that represent the future cash flow potential of the asset in their hands. They will reject anything that smells like a founder trying to retroactively fix a low-margin year.