Understanding your adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) is crucial if you’re preparing to sell your business. Many business owners understate their value by not factoring in non-operational expenses, like a luxury car or a family member on payroll. Adjusted EBITDA helps buyers see your business’s real earning power. It allows both you and potential buyers to make informed decisions based on the actual profitability of your company. Without it, you might go into the negotiation room thinking your business is worth less than it really is.

What is adjusted EBITDA and why it matters

Why remove one-time and unusual income or expense items? Because they distort the picture of how your business performs on a regular basis. Common examples include personal car leases, one-time legal expenses, or non-working relatives on payroll. If you’re valuing your company based on inflated earnings, you’re setting yourself up for a tough negotiation—maybe even a failed deal. Clean financials and a transparent breakdown of these adjustments make your business more attractive to serious buyers.

How to identify adjustments before the deal

Begin by reviewing your general ledger and tax returns. Look for any items that don’t directly support operations, like your Porsche, your cousin’s salary, or annual conference trips that are more vacation than business. Once you’ve flagged those, work with a valuation expert to quantify and document them. This process isn’t just helpful for selling. It can also give you better control over your financials, uncovering ways to boost efficiency and real profitability. Adjusted EBITDA is more than a number—it’s a reality check that makes you look good on paper and in person.

To dig in further, you may want to consider a quality of earnings (QofE) report. Contact me, Len Friedman, if you have any questions or are ready to sell your business.