When a buyer looks at a personal injury firm, the first number they ask for is adjusted EBITDA: the firm’s true, repeatable earnings once the owner’s personal and one-time expenses are taken out. Every dollar you can document as an add-back is a dollar of earnings the buyer applies a multiple to, so a missed add-back costs you several times its face value at the closing table.
Most owners run their firm to keep taxable income low, which is sensible until the day you sell. The same habits that save tax in an ordinary year quietly shrink what your firm appears to earn. Below are the five add-backs we see firm owners overlook most often.
Owner Compensation Above Market
Buyers replace the selling attorney’s role with a salaried lawyer or a managing partner. If you pay yourself more than that replacement would cost, the difference is an add-back. If you take a modest salary and large distributions, the reverse can apply, so the adjustment has to be built carefully and supported with market data.
- Salary, bonuses and distributions paid to the owner above a market-rate replacement.
- Family members on payroll who don’t do work the buyer will need to replace.
- Owner benefits such as personal insurance, retirement contributions and vehicles.
Each of these needs a paper trail: payroll records, a short job description for the replacement role and a reasonable market salary. A buyer’s diligence team will accept a well-documented add-back and challenge one that is only asserted.
“An add-back you can’t document is a negotiating point for the buyer. An add-back you can document is part of your price.”
One-Time and Non-Recurring Expenses
Personal injury firms often absorb large costs that will not repeat under new ownership: an office build-out, a case-management software migration, a rebranding project, or legal and consulting fees tied to a dispute that has been resolved. Because they hit the profit and loss statement in a single year, they make that year look weaker than the firm really is.
We go line by line through the general ledger with each client to separate these items from ordinary operating costs, then tie every one back to an invoice or contract so it holds up in diligence.
Discretionary Spending, Rent and Advertising Timing
Travel, entertainment, memberships and sponsorships that serve the owner rather than case acquisition are common add-backs. So is above-market rent when the firm leases its office from an entity the owner controls: the adjustment brings rent to what a buyer would pay a third-party landlord.
Advertising deserves special attention. A heavy marketing push late in the year produces cases whose fees land after the sale, so the cost sits in your numbers while the revenue benefits the buyer. Showing that timing clearly, alongside your case inventory, is one of the most effective ways to protect your valuation. If you’re preparing for a sale in the next one to three years, a pre-market review of these five areas is the simplest way to make sure the buyer sees the firm you’ve actually built.