Recapturing Profits
This question was asked by a business owner who is considering the sale of her business. An addback is an expense that is not a normal one for the business and is, therefore, taken out of the equation when performing a valuation and calculating a company's earning power.

The goal when presenting financial information to a potential buyer is to clearly represent the business earnings. This is done by Recasting the financial information into a spreadsheet that we call a "Normalized Income Statement," a reconstructed representation of the company's performance and the owner's "Discretionary Earnings" across several years.
 
The IBBA (International Business Brokers Association) defines Discretionary Earnings as follows:
"The earnings of a business enterprise prior to the following items: Income taxes, Non-operating income and expenses, Non-recurring income and expenses, Depreciation and amortization, Interest expense or income, Owner's total compensation for those services which could be provided by a sole owner/manager." 
This owner's question, by definition above, clearly qualifies as a non-recurring expense.

Question:
I did a radio spot last year that did not produce results. Would this expense be considered as a possible addback when valuing my business?

Answer:
The short answer to your specific question is yes. A marketing or advertising effort that was a one-time event that did not produce corresponding revenue can be considered as an addback since a new owner would not incur the one-time expense.

Let's consider the same one-time radio ad at a cost of $50K, resulting in one job for $10K and you will not be doing radio again. In this situation, one might make the case for adding back $40K, which is your cost for the ad, less the revenue brought in from the ad..

Most situations are not cut and dried. Every circumstance has its nuances and each would be evaluated based on its particular merits. All addbacks must be reasonably supported because buyers...and lenders...will be looking closely and judging the legitimacy of each.

Read more about addbacks in the valuation process in "Recasting Financials."