We hired an expensive executive team six months ago to build our management layer so the owner could step back, but the buyer is using our trailing twelve-month historical profit which is depressed by these new salaries. How do we calculate a annualized run-rate EBITDA adjustment?

Question

Tyler Smith · Accepted Answer

When you invest in a professional leadership team, your historical trailing twelve-month expenses will show a temporary spike that depresses your EBITDA. However, this investment builds the exact infrastructure that allows a buyer to step in without founder risk. You should not be penalized for making your business more valuable.

To fix this, you must argue for an annualized run-rate EBITDA adjustment in your Quality of Earnings negotiations. This adjustment normalizes the impact of the new leadership team by comparing the current costs against the future capacity they unlock. Under the IVS 105 Income Approach, value is based on the expectation of future economic benefits, not just historical patterns.

Show the buyer that while these salaries were paid for only six months of the trailing period, the operational efficiency, client retention, and pipeline growth they generated are permanent. Map your leadership team onto your Accountability Chart to prove they fully GWC their seats. This shows that the founder's personal involvement has been successfully reduced to near zero.

Present a pro-forma adjustment that annualizes the new salaries but also annualizes the increased capacity and revenue those leaders have brought in. If the buyer refuses this run-rate adjustment, they are trying to buy a scalable, institutionalized business at the price of an owner-dependent shop. Hold your ground and demand a normalized EBITDA calculation that reflects your true run-rate profitability.