The add backs buyers accept when you sell a business in Canada
Every add back a buyer accepts is worth the multiple. This guide takes the Canadian items one at a time, with the evidence a buyer wants for each.
Buyers accept add backs for costs that end with your ownership. The owner’s salary and bonus come back in full, and a family wage comes back for the amount above market. Rent to your own property company is adjusted to market in either direction. At 4 times earnings, a $25,000 add back moves the price by $100,000.
What an add back is worth
Add backs, when selling a business, are the costs on your statements that end with your ownership, put back into profit to show what a new owner would earn. The result is seller’s discretionary earnings, or SDE, explained in SDE or EBITDA, and it is the number a buyer multiplies.
That makes every add back worth the multiple. At 4 times adjusted earnings, a $25,000 add back a buyer accepts adds $100,000 to the price, and one they reject takes the same amount off the number you expected. How to value a business walks through the full method.
Owners of a Canadian controlled private corporation, or CCPC, the usual form of a private company here, have a set of add backs that come from how they pay themselves and their families. Buyers know these items well and test each one.
Your own pay, as salary or as dividends
A salary and bonus paid to you by the company are expenses, so they come off profit and are added back in full. Many owners declare a year end bonus to keep the company’s income near the small business limit, where the federal rate is 9 percent. A bonus that varies from year to year is still the owner’s pay, and a buyer adds it back with the salary. In an Ontario daycare funded on its costs, the owner’s wage for working in the centre is itself an eligible cost under the province’s formula, as selling a daycare works through.
Dividends work differently. They are paid out of profit the company has already taxed, which is why the CRA describes the dividend tax credit as compensating for corporate tax presumed paid on that income. The profit line already includes the money you took as dividends, so the add back for them is zero.
An owner paid entirely in dividends therefore shows a higher profit and a smaller add back. A buyer pricing on EBITDA deducts a market salary for your role either way, so the method of payment leaves the price where it was.
Family members on the payroll
The CRA lets a business deduct a salary paid to a child or spouse when the work is needed to earn the income and the pay is reasonable, comparable to what an unrelated worker would earn. Section 67 of the Income Tax Act sets the same test for every expense: a deduction is allowed to the extent it is reasonable in the circumstances.
A buyer applies the market wage in the other direction. Where your daughter keeps the books at $70,000 and a bookkeeper would cost $50,000, the add back is the $20,000 above market. The full wage comes back only where the role leaves with the family member and the buyer agrees that the work goes away.
Take care with the wording. An add back that describes a family wage as paid for little work also tells a buyer the company deducted more than a reasonable amount, and in a share sale the buyer inherits that tax history. Expect it to show up in the warranties and any holdback.
Management fees to a holding company
Many owners hold their shares through a holding company, and the operating company pays it a management fee. The add back is the part of that fee that pays for your own services, which a buyer replaces with a market salary when pricing on EBITDA.
Where the holding company also pays staff or rent that the operating company uses, that part of the fee is a real cost and stays in the expenses. A buyer will ask for the fee agreement and a breakdown of what the holding company provides. A fee set each year at whatever amount moved the profit tends to draw questions.
Vehicles, personal costs and one off bills
A vehicle you drive personally is an add back for its personal share. The CRA’s guide to taxable benefits treats personal use of a company automobile as a taxable benefit, made up of a standby charge and an operating expense benefit, and notes that the rules can reach a shareholder. A buyer compares the add back with the benefit reported on your T4 or T4A and with the logbook.
Personal travel and phones run through the company follow the same logic, and small documented items pass easily. A legal bill for a dispute that is settled is a one off, and the settlement document proves it. Legal costs that appear every year are part of running the business, whatever each invoice says. Cash takings left off the books stay off the price, since a buyer credits only the sales your records prove, as selling a restaurant explains.
Rent paid to your own property company
Owners often hold the building in a separate company and lease it to the business. The buyer prices the business on rent at market, because that is what the new lease will charge, so the adjustment can run in both directions. The same applies to a plant the company occupies rent free, worked through in selling a manufacturing business.
Rent above market is added back by the amount of the excess. Rent below market works the other way, and a buyer deducts the shortfall from earnings, which lowers the price. Owners who set a low rent to help the company should expect this line in the schedule. Whether you then sell or lease the building affects your net proceeds from the sale.
The add backs, the evidence and how buyers treat them
The table below sets out the common items for a Canadian owner. The last column describes the usual pattern in negotiation and is a guide, since acceptance rates are unpublished.
| Add back | Evidence a buyer asks for | How often a buyer accepts it |
|---|---|---|
| The owner’s salary and bonus | T4 slips and payroll records for each year | Almost always, in full |
| Owner paid by dividends | Dividend resolutions and T5 slips | The add back is zero, since profit already includes it |
| A family member paid above market | A job description with hours, and the market wage for the role | Usually, for the amount above market |
| A family member whose role leaves with them | Payroll records and a note of the duties | Sometimes, where the buyer agrees the work goes away |
| Management fees to your holding company | The fee agreement and a list of what the holding company provides | Usually, for the part that pays for your services |
| A vehicle used personally | A logbook and the benefit on your T4 or T4A | Usually, for the personal share |
| Personal travel and phones | Receipts and a note of who used each one | Usually when small and documented |
| A one off legal bill | Invoices and the settlement document | Usually, once the matter is closed |
| Repairs or marketing called one off | Several years of the same expense line | Often challenged, since most of these recur |
| Rent to your property company above market | The lease and a market rent opinion from a commercial broker or appraiser | Usually, for the excess |
| Rent below market | The same lease and opinion | A buyer deducts the shortfall |
Build this schedule before a buyer asks, with each line tied to a document in the due diligence file. The AI Valuation tool adds back your pay and personal costs before it applies a multiple, and the other levers on price are in owner dependence and customer concentration. Your accountant usually builds the schedule with you, and the guide for accountants describes that work.
Each stage of a sale, from preparation and valuation to buyers, tax and transition, is set out in how to sell a business in Canada.
Questions owners ask
- What add backs are acceptable when selling a business?
- Buyers accept costs that end with your ownership. They add back the owner’s salary and bonus in full, and the personal share of a vehicle or phone once the records support it. They accept a settled legal bill as a one off, and they challenge expenses labelled one off that recur every year.
- Do dividends paid to the owner count as an add back?
- Dividends are paid from profit the company has already taxed, so they sit below the profit line and the add back for them is zero. A buyer pricing on EBITDA deducts a market salary for your role whether you took salary or dividends.
- Can I add back a salary paid to my spouse or child?
- You can add back the amount above what the role would cost at market, and the full wage only where the role leaves with them. The CRA allows the deduction where the pay is reasonable, so describing it as pay for little work raises a tax question in a share sale.
- How is rent to my own property company treated?
- The buyer prices the business on rent at market. Rent above market is added back by the excess, and rent below market is deducted from earnings, which lowers the price. A market rent opinion from a commercial broker or appraiser settles the number.