Selling a Business

Normalising Earnings From the Seller Side

Build an add-back schedule a buy-side accountant will accept most of — by knowing which adjustments survive testing, which ones cost you credibility, and why the marginal add-back is often negative in value.

  • Advanced
  • 9 min total
  • 12 chapters

What decision this helps you make: Which adjustments to put in your adjusted EBITDA bridge, which to disclose without claiming, and which to leave out entirely.

What this topic is

The seller-side discipline of converting reported profit into the earnings a buyer will underwrite: removing owner compensation above market, genuine one-off items, non-operating and personal costs, and related-party pricing distortions — while correctly excluding the pro forma and run-rate adjustments that buyers systematically reject.

Why it matters

Adjusted EBITDA is the number the multiple is applied to, so every dollar of it is worth a multiple of a dollar. But the schedule is not scored item by item. It is scored as a whole: a schedule with a few unsupportable entries causes the supportable ones to be tested harder and often trimmed. The optimal schedule is therefore not the largest one — it is the largest one that survives intact.

Who should learn it

Owners and finance leads preparing for a sale, CFOs building an earnings bridge, and advisers who have to tell a client that four of their eleven add-backs will not survive.

What you will understand

  • The five categories of adjustment, ranked by how reliably they survive buy-side testing
  • Why pro forma and run-rate adjustments are treated differently from historical normalisations
  • How the credibility effect makes the marginal aggressive add-back negative in expected value
  • How to document a schedule so it is generated from the ledger rather than argued from memory

Prerequisites

Common misconception

"Every add-back I can justify is worth the multiple." Only if it survives. A schedule where 85% of the value is accepted and the buyer stops testing is worth far more than a schedule 30% larger where the buyer finds three bad entries, re-tests everything, and accepts 55%. The second schedule also costs you a bigger escrow and a longer diligence period, because you have taught the buyer to doubt you.