The 7 Most Important EBITDA Adjustments When Selling Your Company
The goal of any entrepreneur should be to build a successful business, sell it, and use the profits to move on to the next chapter in their lives. Sounds simple enough but part of the devil is in the expense details. Often business owners leave a significant portion of their lives’ work on the table when selling their companies. In many cases, it has to do with how their business accounts for certain expenses.
The value of a company is generally a multiple of its EBITDA (earnings before interest, taxes, depreciation, and amortization). While the multiple may be set by the industry, the business owner is not a passive bystander—or at least, you shouldn’t be. There are aspects under your direct purview that influence whether that multiple is at the upper or lower end of the established range. Whether you sell for 1x or 10x depends on many factors like your industry, company stage, business model, operating efficiencies, company specific risks, sustainability, management, and—last but not least—the recast EBITDA you present to buyers.
For better or worse, EBITDA has become the language of selling businesses. In most cases, it is to the seller’s advantage to normalize or adjust EBITDA to account for current or legacy company expenses that will not continue after the sale because the higher the EBITDA, the higher the selling price. However, don’t be tempted to adjust too much. A buyer will smell that ploy like sharks to chum. The goal isn’t to deceive the buyer; it is to accurately show your company’s earnings, which helps a buyer determine current and future value, so when adjusting your EBITDA, be realistic.
Here are the seven important EBITDA adjustments to make when preparing to sell your business:
1. Lifestyle expenses. Over time, many business owners tend to mingle their business and personal finances. Often many personal expenses like luxury cars and family vacations are deducted as a business expense. These business deductions for lifestyle expenses negatively impact your company’s earnings profile, so they need to be carefully added back to your EBITDA.
2. Owner salaries and bonuses. The business owner’s compensation rarely matches what a hired executive would be paid. In most cases, it is higher, but in other cases it is lower. Either way, it needs to be adjusted, as do bonuses, to provide a more accurate EBITDA. So, if the owner gets a significant year-end bonus, adjusting that payout will result in increased EBITDA. If the owner only takes a nominal salary, the EDITDA will go down.
3. Family members’ wages and benefits. Don’t forget family members on payroll. Many business owners use family members to shift income and/or provide employment and benefits to loved ones at above-market wages. Unless the family member will continue in their current position with the same salary and/or will not be replaced with another for a similar wage, the salaries and benefit costs should be added back to the EBITDA.
4. Start-up costs and one-time expenses. If a new product or service was introduced or a major one-time expense was incurred within the last three years—a typical window of time analyzed by potential buyers and their lenders—and especially the trailing 12 months, those costs should be eligible to be added back to EBITDA because they won’t be incurred again going forward. Keep in mind that many of these line items are often negotiation points with buyers, so have a clear business case for why these expenses will not continue in the future.
5. Lawsuits and professional fees. Any expense related to a lawsuit or other non-recurring legal and financial obligations—lawyers’ fees, court costs, settlements etc.—that occurred during the review period should be added back to your EBITDA. Don’t forget consultants, business coaches, and other advisors hired for projects and initiatives that are unrelated to the continuing operations of the company.
6. Adjust rents to fair market value. Many business owners buy buildings and plant facilities and then lease them to their companies at rents that may be above or below fair market value. These expenses should be normalized to fair market value for your area and industry.
7. Repairs and maintenance. Business owners will often list capital expenses as repairs. While that is a good way to minimize tax liability, it’s lousy for your company earnings. So, it’s crucial to identify and add any of these capital expenses back to the EBITDA.
We help companies sell to strategic buyers for maximum value. We identify key opportunities to improve EBITDA as well as potential financial red flags that a buyer could use to drive down the selling price. Making the right EBITDA adjustments and then presenting them in the right manner can make a difference in millions of dollars.
Are you maximizing your company's growth and valuation potential?
Get your free score + 5 custom scorecards to see a point by point analysis of your company.