Business valuation add-backs and EBITDA normalisation.

Normalising earnings (or making 'add-backs') adjusts a business's reported EBITDA to reflect what an arm's-length owner would actually earn. Legitimate add-backs include the gap between an above-market owner salary and a replacement manager's cost, genuine one-off expenses, related-party rent adjusted to market, and private costs run through the business. Ongoing marketing, essential software and any 'discretionary' spend that drives current revenue are not add-backs — you cannot add back the engine. One-off income such as JobKeeper or a government grant is removed as a negative add-back. Each line needs documentary evidence — invoices, BAS, payroll and bank statements — to survive due diligence, and the normalised figure becomes the Future Maintainable Earnings (FME) that is capitalised to value the business.

What 'normalising earnings' actually means — and why it is not creative accounting

Normalisation adjusts a business's reported profit to reflect what a hypothetical, arm's-length owner would earn running the same business. It exists because a set of financials is prepared for tax and compliance, not for valuation — it reflects how the current owner chooses to run their money through the entity, not the sustainable earning power a buyer is paying for. Under the market value standard (IVS 104, and the Spencer willing-but-not-anxious buyer-and-seller test the ATO applies), the question is what an informed party would pay for the earning capacity that will actually transfer. So the valuer strips out distortions that are specific to the current owner, non-commercial, or genuinely one-off, and loads back anything the reported figure is understating. Done properly, normalisation is neutral: it moves earnings up where a private cost inflated expenses, and down where an owner's below-market salary or a windfall grant flattered them. An add-back schedule that only ever moves earnings up is an owner's wish list, not a valuation — and a due-diligence team will treat it as one.

The add-backs that survive review

These are the categories a buyer's accountant and a reviewing valuer will generally accept, provided the evidence is there. The theme is consistent: the cost is either specific to the current owner, non-commercial, or non-recurring — so it will not follow the business to a new owner.

• ·Owner and director remuneration normalised to a replacement-manager cost — the single largest and most-scrutinised add-back. If the owner draws $340,000 but a hired general manager doing the same role benchmarks at $160,000, the $180,000 excess is added back. The reverse is a negative add-back: a working owner who takes no salary means a market salary must be deducted, because a buyer will have to pay someone to do that job.
• ·Superannuation and on-costs on the excess remuneration — the Superannuation Guarantee (12% from 1 July 2025), payroll tax and workcover attributable to the salary being normalised move with it.
• ·Related-party rent, interest or management fees adjusted to market — premises leased from the owner's SMSF or a related trust at above (or below) a market rent are re-set to an independently appraised market figure; the difference is the add-back.
• ·Genuine non-recurring items — a one-off legal settlement, a redundancy round, a bad-debt write-off well outside the normal pattern, relocation costs, or a discrete consulting project that will not repeat.
• ·Private expenses run through the business — the owner's personal motor vehicle, family travel coded as business, private phone and home costs, or a relative on the payroll with no operational role. These inflate expenses for a buyer who will not incur them.
• ·Accounting-policy and once-off provision adjustments — a one-time inventory write-down or a change in depreciation approach that distorts a single year's earnings against the underlying trading pattern.

The add-backs buyers and reviewers reject

This is where owner-prepared add-back schedules fall apart in due diligence. The governing principle is simple: you cannot add back the engine. If a cost is genuinely required to produce the revenue the valuation is built on, removing it overstates maintainable earnings and the buyer will strike it out.

• ·Ongoing marketing and advertising labelled 'discretionary' — the spend that generates the current lead flow and revenue is an operating cost, not an add-back. It only becomes an add-back to the extent it is provably a one-off campaign that produced no lasting benefit, which is rare and needs evidence.
• ·Software, SaaS and subscription tools that the business runs on — the CRM, accounting, hosting and industry platforms are cost of doing business; a new owner inherits every one of them.
• ·'Discretionary' training, R&D or product spend that actually sustains the pipeline — cutting it may lift this year's profit, but the earnings would not be maintainable without it.
• ·Repairs and maintenance that are really deferred capital expenditure — dressing up a needed asset replacement as a removable cost overstates both earnings and the assets transferring.
• ·Recurring 'one-offs' — legal fees, bad debts or write-downs that appear every year at a normal level are part of the cost base, however they are labelled in the schedule.
• ·Wages of staff who do real work — trimming genuine roles to lift EBITDA produces an earnings figure the business cannot actually deliver once the buyer has to re-hire.
• ·Any line with no documentary support — an add-back a buyer cannot trace to a source document is disallowed on that basis alone, regardless of its merits.

Negative add-backs: JobKeeper, grants and one-off income

The adjustments that reduce earnings are what separate an independent valuation from an owner's optimistic schedule — and they matter most for any look-back period that touches FY2020 and FY2021. JobKeeper wage subsidies (paid to eligible employers from 30 March 2020 to 28 March 2021) and the ATO's Cash Flow Boost credits materially inflated reported earnings in those years. They were assessable income for tax, but for valuation they are non-recurring and must be removed, or maintainable earnings will be overstated by amounts that will never repeat. The same discipline applies to any one-off income: a state COVID-support grant, an insurance recovery, a gain on the sale of an asset, or a discrete government grant that is not part of the ongoing model. A recurring, reliable incentive — for example an R&D tax offset the business has claimed consistently and expects to continue — is a judgement call the report should reason through rather than reflexively strip. Below-market owner salary and below-market related-party rent are also negative adjustments: a cost the current arrangement is understating has to be loaded back before the earnings are treated as maintainable.

A worked normalised-EBITDA add-back schedule — and the evidence each line needs

Illustrative figures only, not a recommendation. This is how a normalisation schedule reads for a single financial year, with the source document each line must be traceable to in due diligence. A defensible schedule shows the evidence beside every number, because a due-diligence team tests the schedule line by line — and at a valuation multiple of, say, 4.5x, every $100,000 of accepted add-back adds roughly $450,000 to enterprise value. That leverage is exactly why buyers challenge each line and why undocumented add-backs are struck out.

• ·Reported EBITDA, most recent financial year: $820,000 — the starting point, taken from the general ledger and reconciled to the lodged tax return and BAS.
• ·+ Owner remuneration normalised to replacement cost: +$180,000 — director drew $340,000; a replacement general manager benchmarks at $160,000. Evidence: STP/payroll records, a written role description, and market salary data.
• ·+ Superannuation on the excess salary (12%): +$21,600 — the SG that would not be payable on the $180,000 of excess remuneration. Evidence: super clearing-house and payroll records.
• ·+ Related-party rent normalised to market: +$50,000 — premises leased from the owner's SMSF at $180,000 against a $130,000 market appraisal. Evidence: the lease, the related-party disclosure, and an independent rent appraisal.
• ·+ Private motor vehicle and travel run through the business: +$28,000 — the owner's personal car costs and a family trip coded to travel. Evidence: general-ledger detail, supplier invoices, the logbook, and bank/credit-card statements.
• ·+ Non-working relative's wage: +$45,000 — paid through payroll with no operational duties. Evidence: payroll records and confirmation of the role (or its absence).
• ·+ One-off legal settlement: +$60,000 — a non-recurring dispute settled during the year. Evidence: the settlement deed, solicitor invoices, and board minutes.
• ·− One-off government grant removed: −$25,000 — a non-recurring state-support payment that will not recur. Evidence: the grant remittance and the BAS/tax return.
• ·= Normalised EBITDA: approximately $1,179,600 — the maintainable figure for this year, before it is weighed against the prior years.
• ·Rejected and left in the cost base: 'discretionary' digital marketing and the core software subscriptions the owner asked to add back — both sustain current revenue, so they are the engine, not an add-back.

From normalised EBITDA to a defensible FME and capitalised value

A single normalised year is not the answer — it is one input. The valuer normalises each year of the look-back (typically three years, sometimes more), which is why JobKeeper only affects the FY2020 and FY2021 columns and a one-off settlement only its own year. The normalised years are then weighted for sustainability — usually with more weight on recent performance unless there is a reason not to — to arrive at Future Maintainable Earnings (FME). In this worked case, weighting three normalised years might produce an FME near $1,100,000 rather than the $1,179,600 peak. That FME is capitalised at the appropriate rate (or its reciprocal multiple) to give an enterprise value — at 4.5x, roughly $4.95m — before the bridge to equity value: add surplus and non-operating assets, adjust for a normal level of working capital, and deduct interest-bearing debt. Every step is only as defensible as the add-back schedule underneath it, which is why Oliver Group documents each adjustment against its source document, tests it against IVS 104 and the ATO's market valuation guidance, and has a senior valuer sign the report — lead valuer Jackson Wilson has personally valued more than 3,000 businesses over his career. Fixed fees start at $1,495 + GST (Essential); Comprehensive from $3,995 + GST suits most tax and transaction matters where the add-back schedule will be examined, and the Defensible Valuation File from $8,995 + GST is built for matters where every line will be contested in due diligence or dispute. Retrospective valuation dates are +$495 per date and additional entities +$750 each. We charge no referral fees or commissions to accountants or brokers — paying for introductions would compromise the independence a defensible valuation depends on. One boundary, stated plainly: Oliver Group prepares independent valuations only. We are not a registered tax agent and do not give tax advice — whether a private expense creates a Division 7A or FBT consequence, or how an add-back interacts with a deduction, is a matter for your accountant. Our task is to evidence the earnings, not to advise on the tax.