Our P&L still carries personal vehicle leases, non-market family compensation, and discretionary travel that we plan to classify as EBITDA add-backs. Why do institutional buyers push back on aggressive add-back schedules, and how early should we run our books completely clean?

Question

Tyler Smith · Accepted Answer

Institutional buyers do not reject add-backs because they lack imagination; they reject them because aggressive add-backs signal sloppy operational governance and untrustworthy books. Every dollar you claim as a personal add-back forces a buyer's Quality of Earnings team to audit your internal accounting controls with intense skepticism. If you claim forty disparate personal expenses, the buyer assumes you have buried forty more operational liabilities in the balance sheet.

You should run completely clean financials for at least twenty-four to thirty-six months before going to market. Stop paying personal vehicle leases, country club memberships, personal cell phone plans, and non-operational travel through the operating company. If family members are on the payroll, either adjust their compensation to fair market value based on actual Accountability Chart responsibilities or remove them from the business entirely.

Transition these items well in advance for three practical reasons:

- It establishes an unassailable trailing twelve-month and twenty-four-month baseline of true operating profitability.
- It prevents contentious purchase price adjustments and indemnity holdbacks during diligence.
- It trains your leadership team to manage operational budgets based on reality rather than distorted owner subsidies.

Clean books eliminate friction. A buyer will gladly pay a higher multiple on provable GAAP numbers than a discounted multiple on an unaudited list of subjective add-backs.