Justifying Your EBITDA

By Michael D. Rubin, CEO & Founder · Updated September 2026 · 827 words

Justifying your EBITDA means being able to prove every adjustment with documents before the buyer's accountants ask, so the earnings figure your price rests on comes through due diligence intact. The owner who can show the evidence keeps the price; the owner who has to reconstruct it under pressure usually gives some of it back.

Remember the incentives. Every serious buyer builds its own adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, restated for owner-specific and one-time items), and its version tends to be the one that supports a lower price. Your job is to make your version the one both sides end up using.

Why buyers rebuild the figure

Most buyers of companies with $3 million or more in revenue commission a Quality of Earnings review, an independent accounting examination of your earnings and adjustments. It speaks the language of generally accepted accounting principles (GAAP), which is often not how a private company keeps its books day to day. Many owners run on a cash basis, expense items a GAAP accountant would capitalize, and record inventory once a year. Converting those books to accrual accounting can shift earnings between years or change the trend a buyer sees.

None of this means your figure is wrong. It means an unprepared figure is easy to challenge, and each successful challenge is multiplied by the valuation multiple.

The three groups of adjustments buyers test

Buyers accept adjustments that are clearly non-recurring and supported. They reject those that repeat every year under a different name, lack paperwork, or would simply have to be spent again after closing. Expect scrutiny in three groups:

• Accounting conversions. Revenue recognized when earned rather than when collected, inventory counted and valued properly, accrued expenses such as bonuses and vacation recorded in the right period.
• One-time events. Legal settlements, a relocation, an insurance recovery, an unusual loss on a single job, the start-up cost of a new location. The test is whether a new owner would face the same cost again.
• Owner-specific costs. Compensation above or below market, personal vehicles and travel, family members who will not stay, rent paid to a property the owner controls.

Build an evidence file for every add-back

Assemble the file before going to market. If an item cannot be supported, leave it out; one rejected add-back makes a buyer doubt the rest of the schedule. The file should hold:

• A schedule listing each adjustment, the amount, the year and a one-sentence reason.
• The invoices, contracts or payroll records behind each line.
• A reconciliation tying your financial statements to your tax returns for each of the last three years.
• Monthly income statements and balance sheets, so a buyer can see seasonality and the current year's trend.
• Notes explaining any large swings in margin, revenue or headcount.

Recast the balance sheet as well

Most private companies sell on a cash-free, debt-free basis. The price is set for the business as a going concern; you normally keep excess cash and pay off debt from the proceeds, while a normal level of working capital (receivables and inventory, less payables) stays in the company. Owners who park large cash balances in the business sometimes find a buyer treating that cash as part of what it is buying. It is not, unless the buyer pays for it. Show clearly how much working capital the business actually needs and what is surplus.

The debt side needs the same care. Agree early which items count as debt to be paid off at closing: bank loans, equipment financing, and sometimes customer deposits, deferred revenue or accrued bonuses. Each item classified as debt reduces what you receive. Our answer on how outstanding debt and excess cash are treated when a company is sold walks through the common positions.

Preparation that makes the figure hold

Three steps protect the number before you go to market. Make sure managers and key employees can run the company through the transition, because buyers discount earnings that depend on you. Get your financial statements ready for GAAP questions, ideally on an accrual basis. And consider a sell-side Quality of Earnings review of your own, so the buyer's review confirms your figure instead of discovering problems.

Prepared this way, a seller presents what buyers look for most: a well-run company and an owner whose expectations are grounded in evidence. Our guide to what causes a business sale to fall apart in due diligence covers the other issues that surface at this stage.

How MDR & Associates defends the number

Every company we take to market has a financial recast prepared before any buyer sees the name, with adjustments explained and supported. We work through it with your CPA, present it in the marketing package, and defend it in negotiation; a principal of the firm is in every negotiation. You can see where the recast sits in our ten-step process. To get a first read on your adjusted earnings and value, request a free valuation snapshot.

Where this fitsBusiness valuation in Texas →

Questions owners ask next

What if the buyer's EBITDA comes out lower than mine?

Ask for their adjustment schedule line by line. Some differences are honest accounting questions you can answer with documents; others are negotiating positions. Where they are right, the price may move. Where they are not, evidence and competing offers are what hold your number.

How many years of financials will buyers examine?

Usually the last three full years plus the current year to date, with monthly detail for the most recent period. Buyers also compare the statements with your tax returns and bank records, so the three sets need to reconcile before you go to market.