Can I tell if add-backs in the financials are legitimate or just wishful thinking?

You can, but it takes real scrutiny rather than accepting a seller's list at face value. Add-backs are adjustments a seller proposes to "normalize" earnings by removing expenses they say a new owner wouldn't have to pay — a legitimate practice in principle, since things like a departing owner's above-market personal salary or a one-time legal cost genuinely don't reflect ongoing operations. The problem is that add-backs are also one of the easiest places to inflate a business's apparent profitability, by reclassifying ordinary operating costs as "personal" or "one-time" when they aren't.

Legitimate add-backs are specific, documented, and genuinely non-recurring or personal in nature. Questionable ones tend to be vague, repeated year after year despite being labelled "one-time," or conveniently sized to make the numbers hit a round figure. Ask for documentation behind every add-back, and ask what the expense it replaces would actually cost you as the new owner — some "eliminated" costs, like a manager's salary, still need to be paid by someone once the owner is gone.

Have your accountant test each add-back individually rather than accepting the total. A Treadstone business lawyer can help make financial accuracy representations part of the agreement itself.