Our exit broker mentioned we need to calculate normalized EBITDA, but our bookkeeping has historically run through a lot of personal and non-recurring expenses. How do we systematically document and defend our add-backs on our exit runway so the buyer does not claw back the purchase price during due diligence?

Question

Tyler Smith · Accepted Answer

Buyers will scrutinize every single dollar you claim as an adjustment or add-back to your EBITDA. If your books are cluttered with personal vehicles, family salaries for non-working members, and one-time consulting fees, you must clean them up and document them thoroughly before going to market.

To defend these add-backs, you must maintain a highly detailed, ledger-level log. Every single adjustment must be backed up by clear invoices, receipts, and written explanations. If you claim an owner salary adjustment because you are overpaying yourself compared to market rate, you must prove what a market-rate replacement would actually cost.

Use your exit runway to eliminate these personal expenses entirely. The cleaner your books are for the twelve to twenty-four months leading up to the sale, the less room a buyer has to challenge your numbers.

Additionally, categorize any true non-recurring business expenses, such as a major lawsuit settlement or a one-time software implementation cost. Keep these clearly segmented in your financial reporting.

By systematically documenting and defending your adjustments with objective evidence, you build immediate credibility with the buyer's financial team, preventing them from using messy bookkeeping to chip away at your valuation during due diligence.