The Number You Think You Have
You've been running your business for twenty years. You know your EBITDA. You've watched it grow, protected it, optimized it. It's the number your accountant confirms every April, and it's the number you've quietly run through a multiple in your head more than once.
That number is not the number a buyer will pay on.
This isn't a criticism. It's a structural reality of how acquisitions work; one that catches capable, intelligent owners off guard more often than any advisor will admit in a first meeting.
What a Buyer Actually Pays On
When a serious buyer, whether a strategic acquirer or a private equity firm, runs their analysis, they don't use your reported EBITDA. They use adjusted EBITDA. And their adjustments are not the same as yours.
Here's what happens inside a Quality of Earnings (QofE) process, the formal financial diligence most transactions over $5M require:
The buyer's team will recast your financials. They'll identify every item in your P&L that isn't a true, recurring operating expense of the business as it will exist post-sale. Then they'll argue about each one.
The items that reliably survive scrutiny: owner compensation replaced at market rate, one-time legal fees with clear documentation, personal vehicle expenses with clean separation from business use.
The items that rarely survive intact: customer concentration adjustments (they see risk, not addback), revenue from contracts not yet renewed, margins from a client relationship that depends on your personal relationship with the owner.
The Specific Place It Falls Apart
The most common scenario looks like this.
An owner runs a $3M EBITDA business. He's been paying himself $800K per year. His advisor tells him a market-rate replacement CEO would cost $250K. So he adds back $550K, presenting a $3.55M adjusted EBITDA figure.
The buyer's QofE team reviews the business. They find that two clients representing 38% of revenue have no formal contracts and have been doing business with the owner personally for over a decade. They apply a customer concentration haircut. They also note that margins have compressed 200 basis points over three years, suggesting the $3M EBITDA is at the high end of a range, not a stable baseline.
The buyer reprices the deal at a lower multiple on a lower EBITDA. The seller, who had been planning around a number in his head for three years, is blindsided.
The Add-Backs That Will Get Challenged
Not all adjustments are created equal. Here is a plain-language guide to what holds and what doesn't:
Strong add-backs: expenses that are genuinely non-recurring and well-documented: one-time legal settlements, equipment write-offs, pandemic-era relief income, owner life insurance policies that will be cancelled post-sale.
Soft add-backs: expenses that require a story and may be discounted: above-market owner compensation (buyers will argue about what 'market rate' means), related-party rent (they'll get an independent appraisal), family members on payroll (depends on whether their roles are real).
Add-backs that will likely be rejected: adjustments that introduce more risk than value: revenue normalization that assumes growth you haven't proven, cost cuts you haven't yet made, synergies the buyer hasn't confirmed they believe in.
What This Means for You
The implication is not that your business is worth less than you think. It may be worth exactly what you expect. But the path from your internal EBITDA figure to the number that closes a transaction runs through a process that most owners have never experienced; and which is, by design, adversarial.
The buyers who pay full price are the buyers who find no surprises. Every surprise in diligence is leverage. Buyers use leverage.
The owners who come out of a process with the number they expected are the ones who ran their own QofE before going to market. They knew what their adjustments were worth. They built their financial narrative around the numbers that would hold; and didn't oversell the ones that wouldn't.
That work happens 12 to 18 months before you speak to a buyer. Not after the LOI.
If you'd like to understand what your adjusted EBITDA looks like through a buyer's lens, before a buyer tells you, that conversation starts here.
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