We have run our five-million-dollar business on Seller's Discretionary Earnings with substantial personal add-backs for years, but prospective institutional buyers are rejecting half of our adjustments. How do we cleanly recast our financials from SDE to institutional adjusted EBITDA ahead of a sale?

Question

Tyler Smith · Accepted Answer

Main street buyers who finance transactions with SBA loans purchase on Seller's Discretionary Earnings (SDE), which assumes the incoming owner replaces you as the day-to-day general manager. Institutional buyers, private equity firms, and larger strategic acquirers value businesses on adjusted EBITDA, which assumes a fully compensated management team runs operations independently.

To recast your numbers cleanly, review every discretionary add-back through an institutional lens. If you pay yourself four hundred thousand dollars but market compensation for a replacement general manager or Integrator is two hundred fifty thousand dollars, the allowable add-back is only the one hundred fifty thousand dollar difference. Buyers will reject total salary write-offs because someone must be paid to execute your seat on the Accountability Chart.

Scrub personal perks, owner auto leases, family mobile plans, and discretionary club memberships twelve to twenty-four months before going to market. Pay for them out of personal post-tax distributions rather than business accounts. While valid non-recurring expenses such as extraordinary litigation, non-routine software implementations, or one-off facility relocations are accepted adjustments, standard operational travel and entertainment are not.

Document every legitimate add-back with invoices, vendor contracts, and formal general ledger entries. Presenting clean, defensible EBITDA schedules eliminates buyer friction, builds credibility during preliminary financial diligence, and prevents last-minute valuation haircuts.