We have always managed our business to maximize Seller Discretionary Earnings, but buyers are valuing us on institutional EBITDA. How do we clean up our financials and transition our operations to an EBITDA valuation structure?

Question

Tyler Smith · Accepted Answer

Managing a business to maximize Seller Discretionary Earnings is typical for owner operators, but institutional buyers only value businesses based on adjusted EBITDA. If your financials are filled with personal expenses, owner salaries, and discretionary bonuses, a buyer will discount your valuation due to perceived risk and lack of transparency. To transition to an institutional EBITDA structure, you must systematically clean up your financials and institutionalize your operations. Start by reviewing your Accountability Chart. Any operational roles currently held by the owner must be priced at market rate salaries, which will replace your discretionary owner draws with realistic operating expenses. Next, conduct a thorough internal audit to identify and eliminate all nonoperating or personal expenses from your profit and loss statement. Document these adjustments clearly so they can be easily verified by a Quality of Earnings team. Using tools like the Business Integrity Review will help you identify which operational areas need to be professionalized before going to market. By transforming your financials from an owner benefit statement into a clean, corporate EBITDA presentation, you eliminate buyer friction and justify a premium valuation multiple.