Our business has recently crossed the five million dollar revenue mark, and our accountant says we need to stop tracking Seller's Discretionary Earnings and start tracking Adjusted EBITDA. What does this shift mean for our exit preparation?

Question

Tyler Smith · Accepted Answer

This shift is a major milestone in your business maturity. When your company was smaller, buyers valued it based on Seller's Discretionary Earnings, which includes your salary, benefits, and personal expenses run through the business. This model assumes an owner-operator who is deeply involved in daily decisions.

As you cross the five million dollar mark, institutional buyers, such as private equity firms and strategic competitors, enter the picture. These buyers do not want to buy a job; they want to buy a self-sustaining business. They value companies based on Adjusted EBITDA.

To prepare for this transition, you must professionalize your financial reporting. You must pay yourself a fair market rate salary for your actual operational role, rather than taking random owner distributions. If you are acting as both the Visionary and the head of sales, you must account for the cost to replace you in those seats.

Use your Accountability Chart to identify which seats you currently occupy. Work with a qualified M&A accountant to build an Adjusted EBITDA schedule that clearly separates true operating expenses from owner-related costs. This transparency proves to institutional buyers that your business is a professional enterprise with clean, sustainable cash flow that does not depend on owner-subsidized labor.