Understanding EBITDA Adjustments: Protecting Your Sale Price

Understanding how buyers calculate EBITDA is critical to protecting your sale price. Buyers often recalculate EBITDA during due diligence. This can sometimes reduce the final sale price by $50,000 to $200,000 or more through "adjustments" that weren't disclosed in the initial offer.

If you're considering selling your business, there's a crucial financial tactic buyers commonly use that can significantly impact your final sale price. In this discussion, we will help you understand EBITDA adjustment strategies and how to protect yourself during negotiations.

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What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a popular metric used to evaluate a company's performance. Often, it is the key factor in determining your business's sale price.

At Collaborative Commercial Business Brokers, EBITDA serves as the foundation for most business valuations in the $500,000 to $15 million range. Typical multiples range from 2X to 5X, depending on industry, growth trajectory, and business risk factors.

The EBITDA Adjustment Scenario: What Actually Happens

Scenario Setup

Imagine you're running a business with $2 million in annual sales, generating $200,000 in EBITDA. A buyer approaches you, offering a 4X multiple on your EBITDA:

• Annual Revenue: $2,000,000

• Reported EBITDA: $200,000

• Buyer's Proposed Multiple: 4X

• Expected Sale Price: $800,000

  
  

The buyer submits a non-binding Letter of Intent (LOI) based on these figures. Everything looks promising...until due diligence begins.

What Happens During Due Diligence?

Due diligence is the buyer's comprehensive investigation of your business. This typically lasts 30-90 days. During this phase, buyers examine:

• Three to five years of financial statements

• Tax returns and accounting records

• Customer contracts and revenue sources

• Legal structure and compliance documents

• Operating procedures and employee agreements

  
  

This is where EBITDA adjustments commonly occur — and where your sale price can change dramatically.

Common EBITDA Adjustment Tactics Buyers Use

1. Identifying Accounting Misclassifications

If you handle your own bookkeeping, buyers may identify expense categorizations that differ from standard accounting practices.

Common examples include:

• Personal expenses mixed with business expenses

• Capital expenditures incorrectly recorded as operating expenses

• Inconsistent treatment of owner compensation

• Depreciation schedules that don't align with IRS guidelines

  
  

Impact: Even minor reclassifications can reduce your EBITDA by $10,000-$50,000, directly affecting your sale price.

2. Using "Adjusted EBITDA" Calculations

Buyers often calculate Adjusted EBITDA, which may differ significantly from your reported figures.

Adjustments buyers commonly make include:

• Removing one-time expenses you added back

• Questioning discretionary expenses

• Normalizing owner compensation to market rates

• Adjusting for non-recurring revenue

• Factoring in deferred maintenance or capital needs

  
  

Real-World Impact: If the buyer identifies $50,000 in questionable adjustments, your EBITDA drops from $200,000 to $150,000.

New calculation:

• Adjusted EBITDA: $150,000

• Multiple: 4X

• Revised Sale Price: $600,000

  
  

You just lost $200,000 from the expected sale price — without the multiple changing at all.

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How to Protect Yourself: Preemptive Strategies

Strategy 1: Ask Critical Questions Before Signing an LOI

Before accepting any Letter of Intent or offer, ask these specific questions:

"How exactly do you calculate EBITDA or Seller Discretionary Earnings (SDE)?"

• Request their specific methodology in writing.

• Ask for examples of common adjustments they make.

• Understand which expenses they typically add back or remove.

  
  

"What adjustments do you typically make during due diligence?"

• Learn their historical patterns.

• Identify potential red flags in your financials.

• Prepare documentation to support your numbers.

  
  

"Will the purchase price be based on my reported EBITDA or your adjusted EBITDA?"

• Clarify this in the LOI.

• Negotiate caps on allowable adjustments.

• Consider including a "collar" that limits EBITDA adjustments to a specific percentage.

  
  

Strategy 2: Get a Professional Business Valuation

Invest in a professional valuation before listing your business. At Collaborative Commercial Business Brokers, our comprehensive valuations include:

• Industry-standard EBITDA calculations

• Identification of potential adjustment areas

• Documentation to support your financial claims

• Comparable sales analysis

  
  

This upfront investment can save sellers tens of thousands during negotiations.

Strategy 3: Clean Up Your Financials Early

Work with a CPA experienced in business sales to:

• Separate personal and business expenses completely.

• Standardize accounting practices before selling.

• Document all add-backs with supporting evidence.

• Create a detailed "Quality of Earnings" report.

  
  

Strategy 4: Work With an Experienced Business Broker

A qualified business broker serves as your advocate throughout the process. In my practice, I:

• Pre-qualify buyers to ensure they understand valuation methodologies.

• Negotiate LOI terms that protect against excessive adjustments.

• Provide weekly progress dashboards during due diligence.

• Challenge unjustified EBITDA reductions with data and comparables.

  
  

As a member of the International Business Brokers Association (IBBA) and licensed in Wisconsin and Illinois, I've successfully navigated these negotiations for businesses ranging from $300,000 to $15 million in value.

Red Flags: When EBITDA Adjustments Cross the Line

Not all EBITDA adjustments are legitimate. Watch for these warning signs:

• Excessive adjustments: Reductions exceeding 10-15% of reported EBITDA.

• Subjective assumptions: Adjustments based on "industry standards" without data.

• Moving goalposts: New adjustment categories appearing late in due diligence.

• Pressure tactics: Buyers threatening to walk away unless you accept reduced valuations.

  
  

If you encounter these tactics, consult with your broker and attorney immediately.

Industry-Specific EBITDA Considerations

Service-Based Businesses

In my experience with service businesses (accounting firms, spas, water purification companies), EBITDA adjustments often focus on:

• Owner compensation normalization

• Customer concentration risk

• Recurring vs. one-time revenue

  
  

Manufacturing and Distribution

For businesses with physical inventory, considerations include:

• Working capital adjustments

• Equipment maintenance and replacement schedules

• Inventory valuation methods

  
  

The Bottom Line

Selling your business represents years of hard work and likely your largest financial transaction. Understanding how buyers calculate and adjust EBITDA is essential to protecting your sale price.

Key Takeaways:

✓ Ask Questions Early: Understand buyer's EBITDA calculation methodology before signing an LOI.

✓ Professional Preparation: Invest in professional valuations and financial cleanup 12-24 months before selling.

✓ Expert Representation: Work with experienced advisors who understand buyer tactics.

✓ Document Everything: Be prepared to defend your numbers with evidence and supporting documentation.

✓ Know the Red Flags: Recognize when adjustments cross the line from reasonable to predatory.

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Frequently Asked Questions

Q: What is the difference between EBITDA and SDE (Seller Discretionary Earnings)?

A: SDE includes owner compensation and discretionary expenses, making it more appropriate for smaller businesses (under $2M revenue). EBITDA is typically used for larger businesses with professional management structures.

Q: How much can EBITDA adjustments typically reduce my sale price?

A: In my experience, buyers commonly propose adjustments ranging from 10-25% of reported EBITDA. With proper preparation and representation, many of these adjustments can be challenged or minimized.

Q: Should I hire a CPA before selling my business?

A: Absolutely. Working with a CPA experienced in business sales 12-24 months before listing can help you identify and correct issues that buyers will find during due diligence, protecting your sale price.

Q: Can I negotiate caps on EBITDA adjustments in the LOI?

A: Yes. Experienced business brokers often negotiate "collars" or caps that limit allowable EBITDA adjustments to a specific dollar amount or percentage, providing sellers with more certainty.

To your success,

Jason Huett

CEO | Business Broker

Collaborative Commercial Business Brokers, LLC.