We have run several personal expenses and family salaries through the business for years to minimize our tax liability. What is the operational process for cleanly documenting and normalizing these discretionary add-backs so a buyer does not discount our adjusted EBITDA?

Question

Tyler Smith · Accepted Answer

Normalizing discretionary owner expenses is a standard part of preparing your financials for a sale, but you must start this process years before you go to market. Buyers look at adjusted EBITDA to understand the true earning power of your business, but they will heavily discount any adjustments that lack clean, verifiable documentation.

To prepare your books, you must separate personal and business expenses. Work with your financial team during your exit runway to create a clean ledger of all owner discretionary add-backs. This list typically includes personal vehicles, country club memberships, family members on the payroll who do not work in the business, and non-operational real estate expenses. Every single add-back must be backed by receipts, tax records, and clear explanations.

If a family member is on the payroll, determine if their role is essential. If it is, adjust their salary to fair market value on your pro forma financials. If their role is not needed, plan to phase it out. By utilizing the Step by Step Exit benchmarking and credit analysis tools, you can ensure your financial reporting transitions from tax-minimization mode to value-maximization mode. The cleaner your documentation, the less leverage a buyer has to demand a valuation haircut during due diligence.