How to Answer “What are common EBITDA add-backs and how do you diligence them?” in Private Equity Interviews
In an ebitda add-backs private equity interview, you’re being tested on whether you can separate headline Adjusted EBITDA from defensible earnings power. The question “What are common EBITDA add-backs and how do you diligence them?” is really about judgment, process, and how you would pressure-test a seller’s adjustments the way you would in a buyout.
A strong answer names the common EBITDA add-backs, explains what “good” looks like, and then lays out clear steps to diligence EBITDA adjustments with evidence, accounting linkage, and sustainability tests.
What PE Interviewers Look For in EBITDA Adjustments
Interviewers want to see that you understand the purpose of add-backs in private equity: estimating maintainable EBITDA for valuation, leverage sizing, covenant headroom, and the operating plan. They’re assessing whether you can identify which adjustments are credible versus aggressive, and how each one impacts the investment case.
They’re also testing practical due diligence thinking: Can you tie an add-back to the GL, contracts, payroll, bank statements, and cash? Can you distinguish non-recurring from non-operating, and avoid “double counting” with run-rate synergies or budget assumptions?
Finally, they’re evaluating communication under pressure—typical of private equity technical questions and financial modeling interview questions. A good associate-level answer is structured, uses consistent definitions, and shows you’d build a defensible bridge from reported EBITDA to underwriting EBITDA.
EBITDA Add-Backs Private Equity Interview: Answer Framework
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Step 1: Define the goal and set the guardrails (Step 1)
Start by stating what you’re solving for: a sustainable, run-rate EBITDA that a buyer can underwrite. Clarify that add-backs should be (i) well-supported, (ii) non-recurring or non-operational, and (iii) not already reflected in forward-looking assumptions.
Then lay out simple guardrails you’ll apply to every adjustment:
- Evidence: Is there documentation and a clear audit trail to the general ledger?
- Duration: Is it truly one-time, or does it repeat every year?
- Cash vs non-cash: Does it affect cash earnings, working capital, or capex needs?
- Control: Can management actually eliminate the cost post-close?
- No double count: If it’s in the operating plan/synergies, it shouldn’t also be in Adjusted EBITDA.
This frames how to answer EBITDA add-backs questions consistently and avoids sounding like you’re memorising a list.
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Step 2: Cover the major categories of common EBITDA add-backs (Step 2)
Group common EBITDA add-backs into a few buckets and give examples in each:
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Non-recurring expenses: one-time legal settlements, IPO/M&A fees, a discrete litigation matter, a one-off facility shutdown.
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Owner/management items: above-market owner compensation, personal expenses run through the business, non-arm’s-length related-party charges.
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Restructuring and transformation: severance, footprint rationalisation, consulting fees—but only if there’s a defined plan and the benefit is sustainable.
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Accounting or classification items: reclasses between cost lines, rent/lease presentation changes, stock-based compensation policies (jurisdiction and buyer policy dependent), and non-cash impairments (note: impairments are below EBITDA under many presentations, so be precise).
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Run-rate changes (more contentious): savings from a supplier renegotiation already executed, or a site closure already completed. These can be valid, but you must prove the change is implemented and not a forward-looking synergy.
Calling out “more contentious” items signals PE judgment rather than acceptance of the seller’s narrative.
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Step 3: Diligence workflow to validate and quantify adjustments (Step 3)
When you diligence EBITDA adjustments, describe a repeatable workflow:
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Build an add-back bridge: Reported EBITDA → management Adjusted EBITDA → your underwriting EBITDA, with each adjustment itemised.
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Tie to source data: For each item, reconcile to the GL detail and trial balance; request invoices, contracts, payroll registers, and bank support. If it can’t be tied, it’s “unproven”.
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Quantify correctly: Ensure you’re capturing the P&L impact in the period, not cash paid timing. Watch for cut-off errors and partial-year items.
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Assess recurrence: Look back 24–36 months for similar charges; if “one-time” shows up annually, haircut or remove.
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Check interdependencies: If you add back severance, confirm whether the associated headcount reduction is reflected in wages going forward; avoid adding back costs while keeping the same cost base.
This is the core of EBITDA adjustments in private equity due diligence: evidence, quantification, and sustainability.
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Step 4: Apply PE-specific sanity checks and haircut logic (Step 4)
Explain how you decide whether to accept, reject, or haircut:
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Underwriting conservatism: If the item is plausible but not fully evidenced, include a partial add-back with a clear rationale.
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Run-rate vs synergy: If the savings require a buyer action post-close (e.g., consolidating facilities), treat it as a synergy in the operating plan, not a standalone add-back.
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Working capital and capex implications: Some “savings” increase capex or reduce service levels. If eliminating a cost requires incremental spend, adjust the model accordingly.
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Margin and peer sanity checks: Compare implied EBITDA margin to historical levels and to peers. If adjusted margin jumps without a credible operational change, reassess the bridge.
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Debt/covenant lens: Ask: if lenders saw this adjustment, would they give credit? Even if lender definitions differ, this is a good discipline for maintainability.
This step is where associate-level answers differentiate: you’re not just listing add-backs—you’re underwriting risk.
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Step 5: Translate the diligence conclusion into the model and IC narrative (Step 5)
Close the framework by showing how you operationalise the output:
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Model implementation: Use your underwriting EBITDA as the base for valuation multiples, leverage sizing, and sensitivities. Keep a transparent bridge that can be audited.
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Downside cases: Run sensitivities where the top 1–3 add-backs are removed or haircutted to quantify valuation and covenant impact.
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Documentation: Summarise each adjustment with (i) description, (ii) amount and period, (iii) support received, (iv) your conclusion, and (v) remaining open items.
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Messaging: In an interview, this is how to show you can present to investment committee: “Here are the adjustments we accepted, here are the ones we excluded, and here’s the impact.”
If relevant, you can mention that platforms like AceTheRound help you practise delivering this kind of structured diligence answer out loud, under time pressure.
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Model Answer: Common EBITDA Add-Backs Explained
Common EBITDA add-backs are adjustments from reported EBITDA to a maintainable, run-rate earnings number—things like one-time costs, owner-related items, and restructuring charges that shouldn’t reflect ongoing performance.
In private equity, I’d group them into a few buckets. First are non-recurring expenses like a discrete litigation settlement, one-off professional fees tied to a transaction, or a specific facility shutdown. Second are owner/management items such as above-market owner compensation, personal expenses, or related-party charges that won’t exist post-close. Third are restructuring and transformation costs—severance or consulting—where the key is whether the cost is truly one-time and the benefit is sustainable. Then there are more contentious run-rate adjustments, like savings from a renegotiated supplier contract, which I’d only credit if the change is executed and evidenced.
To diligence them, I’d build a bridge from reported EBITDA to management adjusted EBITDA and then to my underwriting EBITDA, with each add-back itemised. For each line, I’d tie the amount back to the trial balance and GL detail, and request support like invoices, payroll registers, contracts, and bank statements. I’d also test recurrence by looking back 24–36 months for similar items—if “one-time” charges repeat, I’d remove or haircut them. Finally, I’d make sure there’s no double counting with the operating plan or synergies and sanity-check the implied margins versus history and peers.
The output is a defensible underwriting EBITDA in the model, plus sensitivities showing what happens if the biggest adjustments don’t hold up.
- Open with what add-backs *are* (maintainable EBITDA), then move to categories and diligence process.
- Flag run-rate adjustments as higher risk; interviewers expect you to be sceptical, not accepting.
- Use “tie to GL + evidence + recurrence test + no double counting” as the memorable diligence spine.
- Show modelling consequences (bridge + sensitivities), not just accounting theory.
Mistakes to Avoid When You Diligence EBITDA Adjustments
- Listing adjustments without stating the objective: sustainable, underwriteable EBITDA for valuation and leverage.
- Treating “non-cash” as automatically add-backable; some non-cash items signal real economic costs or future capex needs.
- Crediting run-rate savings that aren’t implemented yet, or double counting them with the operating plan/synergy case.
- Not tying adjustments to primary evidence (GL/invoices/payroll) and relying on management’s schedule alone.
- Ignoring cut-off and period issues—using cash paid or partial-year amounts without normalising.
- Forgetting to sanity-check the end result (margin/peer comparison) and the impact on debt sizing/covenants.
Follow-Ups in Private Equity Technical Questions
Which EBITDA add-backs are most likely to be challenged in QoE?
Run-rate savings, “normalised” compensation, and restructuring items are most challenged—because they’re easiest to overstate and hardest to prove as sustainable.
How do you avoid double counting between add-backs and the operating plan?
Maintain a single bridge and a single operating plan: if an improvement requires post-close action, keep it in the plan (or synergies) and don’t also include it as an add-back.
How would you treat stock-based compensation in adjusted EBITDA?
It depends on buyer and lender definitions; I’d be explicit about the policy, show it separately, and assess whether excluding it distorts comparability or economics.
What’s the difference between non-recurring and non-operating?
Non-recurring is about frequency (unlikely to repeat); non-operating is about not part of core operations. Some items can be both, but you should label them correctly and evidence why.
If support is weak but the item seems real, what do you do?
I’d haircut or exclude it until support is provided, and I’d run a sensitivity so the investment case doesn’t hinge on an unproven adjustment.
Private Equity Interview Prep for Add-Back Diligence
- Practise a 3-minute version that always hits: definition → categories of common EBITDA add-backs → how you diligence EBITDA adjustments → modelling impact.
- Build a one-page “add-back bridge” template in your own words and rehearse explaining the top 3 risk flags (recurrence, evidence, double counting).
- Record yourself answering and check for precision: you should say what documents you would request (GL, invoices, payroll) and how far back you look.
- Pressure-test with variations common in private equity technical questions: “What if the savings aren’t implemented?” “What if the cost recurs?” and answer with haircut/sensitivity logic.
- Do one live drill in AceTheRound focused on staying structured when the interviewer interrupts with follow-ups on a specific adjustment.
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