How far in advance do we need to scrub discretionary expenses and owner add-backs from our financial statements to make diligence painless for an institutional buyer?

Question

Tyler Smith · Accepted Answer

Discretionary expenses, family cell phone plans, personal vehicle leases, and non-arm's-length payments to relatives must be cleared out at least two full fiscal years before you go to market, and ideally three.

Buyers do not reject adjusted EBITDA outright, but every dollar of aggressive owner add-backs forces their transaction accountants to audit your financial records with heightened suspicion. When an owner presents a three-million-dollar EBITDA figure that relies on seven hundred thousand dollars of disputed adjustments, the buyer views the underlying management as undisciplined. That friction delays closing, increases legal spend, and invites last-minute purchase price reductions.

Clean financials mean your audited or reviewed profit and loss statements match the commercial reality of operating the company under third-party management. You should work with your financial team to separate genuine normalized operating costs from owner distributions. Pay market-rate compensation for every role, including family members on payroll who must either meet standard GWC™ expectations in the Accountability Chart or be transitioned off the books entirely.

When buyers see two to three consecutive years of clean, predictable margins without an extensive defense required for add-backs, diligence shifts from an adversarial audit to a verification exercise. Clean books demonstrate governance and reduce perceived risk, which directly supports a premium multiple.