How $900,000 of EBITDA Became a $7.2 Million Problem
$900,000 of EBITDA disappeared in diligence.
At an 8x multiple, the owner did not lose $900,000. He lost $7.2 million of enterprise value.
Nobody found fraud. Nobody accused the owner of manipulating the books.
He could explain every add-back. His records could not prove them.
That is the part many owners learn too late:
A buyer pays for the EBITDA your books can defend.
Five adjustments buyers will challenge
Owner compensation. An add-back may be reasonable if the owner is paid above market, but the buyer will subtract what it costs to hire someone to do that work after the owner leaves.
“One-time” expenses. A cost is not one-time because the company dislikes it. If similar expenses show up every year under different labels, the buyer will treat them as part of running the company.
Revenue and expense timing. Work completed in January does not become December revenue because the company needed the year-end number. Buyers will test whether sales and costs landed in the right period.
Capitalized operating costs. Putting a normal operating expense on the balance sheet can make EBITDA look better today without improving the business.
Related-party expenses. Rent paid to the owner, family payroll, and services from affiliated companies must be compared with what an unrelated buyer would actually pay after closing.
If an add-back needs a long explanation but has no clean paperwork, expect the buyer to discount it.
Your EBITDA has to tie back to the books
The EBITDA schedule has to tie to the general ledger. The ledger has to tie to invoices, contracts, payroll, and bank activity. Everyone answering questions needs to tell the same story.
Strong finance teams do not wait until the company is for sale. They keep an add-back file during the year, while the invoices, records, and reasons are easy to find.
The goal is to make every add-back clear enough that someone outside the company can follow the math without a meeting.
You protect the EBITDA number during the year the transactions occur, not during the week the buyer asks about them.
Start with reported results and build a complete bridge to adjusted EBITDA. Show the amount for every add-back, who owns the explanation, why it belongs, and where the proof is stored.
For each add-back, write down whether it is truly one-time, unrelated to normal operations, specific to the owner, or an adjustment to market cost, and explain why. Then run the three-year test: check whether the same type of expense showed up before under another label, or is likely to return after the sale. If yes, do not call it one-time without expecting the buyer to challenge it.
Hand the file to someone who did not prepare it. If that person cannot follow the bridge without a meeting, it is not ready for a buyer.
Before the next quarter closes
Tie adjusted EBITDA to the general ledger and flag any add-back you cannot trace cleanly.
Take the three largest add-backs and gather the contracts, invoices, payroll records, and written explanation behind each one.
Make one person responsible for updating the bridge every quarter so the proof is built in real time instead of reconstructed during a sale.
A clear EBITDA schedule doesn't ensure a buyer will accept every add-back. It moves the focus from memory and opinions to concrete records and judgment. If an add-back can't be verified without a meeting and detailed explanation, it's safe to assume a buyer will question it. Consider this: at an 8x multiple, every unsupported $100,000 risked means $800,000 of enterprise value.
Which add-back do buyers challenge most often in your experience: owner compensation, one-time expenses, revenue timing, capitalized costs, or related-party expenses?
If you are building a company whose earnings can stand up without the owner in the room, get Win or Win at https://www.winorwinplaybook.com.
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