Today's SMB Manual explains how buyers arrive at their own EBITDA figure during diligence, why it can differ from the seller's number, and what owners can do beforehand to reduce that gap.

You have decided to sell the business. The broker asks for your financials, and together you prepare an add-back schedule covering items such as your $300,000 salary, the company truck, your spouse on payroll, and a trade show in Las Vegas that included some personal travel. Your reported earnings of $850,000 can become $1.2 million of adjusted EBITDA after add-backs. At a 4x multiple, that $350,000 difference translates into $1.4 million of additional implied value. Once the buyer signs the LOI and hires a Quality of Earnings firm, however, each adjustment is reviewed independently, and the final EBITDA number can change.

A QoE is different from an audit. It is typically performed by a specialist accounting firm to determine whether the seller's earnings are recurring and likely to continue after the business changes ownership. The firm may review roughly 36 months of financial statements, reconcile the P&L against bank deposits and tax returns, and examine the add-back schedule line by line. 

Three types of adjustments typically come up. 

Standard EBITDA adjustments, including interest, taxes, depreciation, and amortization, are generally straightforward. One-time expenses, such as a settled lawsuit or repairs following a flood, are valid if the seller can document the expense and demonstrate that it was genuinely non-recurring. 

Normalization adjustments require more judgment. Your salary, for example, may not be added back in full. The adjustment is limited to the difference between your salary and the market rate for a manager doing the same job. Below-market rent paid to a property LLC you own may be adjusted upward. 

Expenses described as one-time will also be compared with prior years. If a similar cost appears in 2023, 2024, and 2025, it becomes difficult to argue that the 2026 expense is non-recurring.

Some industry advisers estimate that 20%- 40% of seller-claimed adjustments can be challenged or removed during due diligence. At a 3x multiple, a $50,000 add-back reduces the implied purchase price by $150,000. SBA-financed acquisitions introduce another consideration. Starting October 1, SBA-financed acquisitions of $3 million or more may require the lender to order its own Quality of Earnings review. The lender will then use the earnings figure from that review to determine whether the business generates enough cash to meet the SBA’s 1.25x debt-service coverage requirement. If the review rejects part of the seller’s add-backs, the impact goes beyond a lower valuation. It can also reduce the size of the loan the buyer qualifies for, leaving less financing available to complete the purchase.

Preparation works best when it begins 12-24 months before the business goes to market. Compare your add-back schedule with prior years and flag any expenses that keep appearing even though they are labeled as one-time. Remove personal spending from the business where possible. For each remaining add-back, keep the supporting documentation available, including invoices for unusual expenses, documents confirming that the expense will not continue, payroll records, and compensation benchmarks showing what a market-rate manager would earn for the same role.

Businesses approaching or exceeding $2 million of EBITDA may also consider a sell-side QoE before launching a sale process. These reviews can cost roughly $15,000 to $50,000, depending on the company's size and complexity, but they allow the seller to test adjustments using a process similar to the one the buyer will later apply. Issues can then be addressed before they affect negotiations or financing.

The final transaction value depends on the EBITDA the buyer can verify during due diligence. Each add-back should have clear documentation and a reasonable basis for inclusion. Strong support for those adjustments, along with clean, consistent financial statements, reduces the likelihood that the buyer will lower adjusted EBITDA or revise the purchase price during the review.