The buyer's accounting team is attacking our owner add-backs during preliminary diligence, trying to strip three hundred thousand dollars out of our adjusted EBITDA. How do we systematically document and defend our pro forma adjustments to avoid an automatic purchase price haircut?

Question

Tyler Smith · Accepted Answer

Every dollar of EBITDA stripped out by a buyer during diligence costs you four to eight dollars of enterprise value depending on your multiple. Buyers target owner add-backs because aggressive sellers frequently lump ordinary operational expenses into discretionary categories. If your documentation is sloppy, the buyer will disallow the adjustment and reduce their cash offer at closing.

Defending your pro forma EBITDA requires rigid institutional evidence before you ever sign an LOI.

- Separate owner compensation from market-rate replacement costs. If you paid yourself five hundred thousand dollars but your Accountability Chart shows a replacement Integrator or GM can be hired for two hundred thousand, document the market salary using verified executive compensation benchmark studies. The three-hundred-thousand-dollar difference is a clean, defensible add-back.
- Eliminate discretionary expenses from the general ledger early. Personal auto leases, discretionary travel, club memberships, and family cell phone plans should be excised from the business at least twelve months prior to going to market. If they remain, produce audited invoices proving they provided zero commercial utility.
- Document non-recurring professional fees. One-time IT migrations, specialized legal disputes, or strategic consulting engagements can be added back, provided you supply the underlying engagement letters and invoices proving the event will not recur post-close.
- Categorize severance and facility moves cleanly. Show signed severance agreements and closed real estate leases to prove these overhead burdens terminated permanently.

When you present a meticulously footnoted adjustment schedule supported by invoices and third-party data, the buyer cannot easily dismiss your adjustments without appearing unreasonable.