Your EBITDA Isn’t What You Think It Is

And Sophisticated Buyers Already Know It Before You Sit Down

There is a conversation that happens thousands of times a year across Canada. It unfolds over golf rounds, dinner tables, and quiet advisory meetings between business owners and the people they trust most. It sounds something like this: “We’re doing about three million in EBITDA.” The number lands with authority. It carries the weight of years of work, sacrifice, and compounding effort. It feels like truth.

But somewhere beneath the confidence, a quieter voice exists. One that remembers the personal vehicle expenses run through the company. The above-market management fee paid to a holding entity. The one-time equipment write-off that, if you are being precise, was not exactly one-time. The family member on payroll whose role would not be backfilled by an arm’s-length hire at the same cost.

That quieter voice does not speak at dinner. But in a formal sale process, it eventually must.

The gap between the EBITDA a founder believes in and the EBITDA a buyer will actually underwrite is not simply a financial discrepancy. It is a credibility problem, a trust problem, and ultimately a multiple problem. Understanding how that gap forms, why it quietly widens over years of owner-operator decisions, and how to close it before a deal process begins is one of the most strategically valuable things a business owner can do in the years preceding an exit.

The Number That Feels Real But Cannot Survive Diligence

Most private business owners arrive at their EBITDA figure through a combination of internal management accounts, year-end tax filings, and a set of verbal adjustments they carry in their heads like trusted companions. The legal dispute from three years ago. The daughter who was on salary during university and has since moved on. The company-paid memberships that are genuinely optional and personal in nature.

Each of these adjustments may be entirely legitimate in isolation. Normalized or adjusted EBITDA is an accepted and expected starting point in mid-market mergers and acquisitions. Buyers understand that owner-operated businesses run with a degree of personal overlap. The issue is not the existence of addbacks. The issue is how those addbacks are presented, supported, and stress-tested when a sophisticated buyer deploys a quality of earnings team against your financials.

A quality of earnings analysis, which has become near-universal in transactions above two million dollars in enterprise value, does not accept your verbal summary. It reconstructs earnings from source documents. It traces cash flows. It interrogates year-over-year patterns for inconsistencies. It distinguishes between genuinely non-recurring items and expenses that have been classified as one-time repeatedly across multiple years.

When addbacks are undocumented, inconsistently applied, or narratively weak, they begin to erode. Sometimes gradually. Sometimes in a single diligence meeting that reshapes the entire deal structure.

Why Owners Overestimate Their Own Numbers

This is not a character failing. It is a natural consequence of how owner-operators experience their own businesses over time.

When you run a company for fifteen years, certain financial decisions become invisible to you. The SUV that is 80 percent personal becomes “the company truck.” The annual retreat to a resort that blends strategy with leisure becomes “an offsite.” The consulting fee paid to a spouse who contributes meaningfully but whose market-rate compensation would be a fraction of what is being paid becomes a normal line item in the overhead.

None of these decisions are inherently problematic. Many are prudent tax management strategies entirely appropriate in an owner-operated context. The problem surfaces when those same decisions are presented to a buyer without translation. Without the narrative infrastructure to explain them, contextualize them, and demonstrate that they will not recur under new ownership, they become liabilities rather than addbacks.

The psychological phenomenon at play here is what behavioral economists call the endowment effect. We assign higher value to things we own and have built than an objective outside observer would assign to them. This applies to businesses as directly as it applies to real estate or collectibles. A founder who has poured identity into a company will, almost always, unconsciously calibrate its value upward. The buyers across the table do not share that emotional history. They are underwriting future cash flows, not rewarding past effort.

The Diligence Room and the Anatomy of a Collapsed Deal

Picture a deal that looked clean on paper. A manufacturing company generating what the owner reported as $2.8 million in normalized EBITDA. The initial letter of intent was signed at a seven-times multiple. Enterprise value of $19.6 million. Life-changing money.

Six weeks into diligence, the buyer’s quality of earnings team begins circling three categories of addbacks totaling $620,000. A related-party lease paid at a rate 40 percent above market comparables. A “one-time” consulting engagement that appeared in each of the prior four years under slightly different descriptions. And an owner salary addback that assumed a replacement CEO could be hired for $180,000 annually, when the actual market rate for the operational role being performed was closer to $280,000.

None of these were fabrications. They were real items, poorly documented, inconsistently framed, and not pre-emptively addressed before the buyer’s team arrived with questions. The adjusted EBITDA settled at $2.18 million after negotiation. At the same multiple, the enterprise value dropped to $15.3 million. Four million dollars in value, dissolved not because the business was worth less, but because the financial presentation could not defend what it was claiming.

This is the scenario that keeps owners awake. Not the negotiation itself. The feeling of having the numbers taken apart in a room where you cannot control the narrative.

Inconsistent Reporting and What It Signals to a Buyer

Beyond specific addback disputes, there is a broader credibility signal that buyers read before a single addback is ever discussed. It is the internal consistency of your financials over time.

When revenue recognition policies shift between years without explanation, when gross margin percentages fluctuate in ways that do not align with cost input changes, when owner compensation appears in three different line items across three different years of financials, a pattern emerges. And that pattern communicates something specific to an experienced acquirer.

It communicates that the business has been managed for tax efficiency rather than for clarity. That the financials have been optimized for minimizing reportable income rather than for demonstrating value. This is an entirely rational strategy for an ongoing business owner with no near-term plans to sell. It becomes a significant obstacle when the goal changes.

The institutional buyers, private equity groups, and strategic acquirers who operate at this level of the market have developed finely tuned instincts for what they call “hair on the deal.” Inconsistent reporting, even when individually explainable, creates a cumulative impression of opacity. And opacity is expensive. It either reduces the price or adds conditions and escrow structures that erode net proceeds.

The Addback Problem Is Not Financial, It Is Narrative

Here is a reframe that most business owners find genuinely clarifying: the addback problem is not primarily an accounting problem. It is a storytelling problem.

A well-presented addback schedule does not simply list expenses and declare them non-recurring. It builds a case. Each item is supported by documentation. Each item is explained in plain language that a non-specialist buyer can follow. Each item is anticipated before the buyer asks about it, which shifts the dynamic from reactive defense to proactive transparency.

Consider two ways of presenting the same addback. Version one appears as a line in a spreadsheet: “Owner personal expenses, $147,000.” Version two appears as a documented schedule with a brief explanatory note: “Owner-related expenses totaling $147,000, comprising $82,000 in vehicle costs related to two personal vehicles maintained on the company fleet, $41,000 in club memberships and personal travel, and $24,000 in discretionary charitable donations made in the owner’s name. These costs are fully discretionary and will not be replicated under new ownership. Supporting documentation available.”

Both versions are presenting the same financial reality. But only one of them invites trust. Only one of them signals to a buyer that the management team understands what they are looking at and has done the work of presenting it honestly.

This is the essence of buyer-grade financial preparation. It is not about inflating numbers. It is about presenting accurate numbers in a way that earns credibility rather than erodes it.

What “Buyer-Grade” Actually Means in Practice

The phrase gets used frequently in deal preparation conversations, but its practical components are worth unpacking directly.

Buyer-grade financial presentation typically encompasses several interconnected elements. First, a normalized income statement that clearly separates reported financials from adjusted figures, with each adjustment individually identified and cross-referenced to supporting documentation. Second, a consistent three-to-five year historical view that allows a buyer to observe trends, identify any anomalies, and understand the trajectory of the business without needing to request additional data. Third, a working capital analysis that defines what a normalized level of working capital looks like for the business and defends that figure against buyer attempts to renegotiate the peg at closing. Fourth, a capital expenditure schedule that distinguishes between maintenance capex required to sustain current operations and growth capex that is discretionary.

Each of these components, when prepared in advance and organized into a cohesive information package, does something important. It shifts the center of gravity in a diligence process. Instead of the buyer’s team setting the agenda and the seller’s team responding reactively, the seller has framed the conversation. The buyer is working within a narrative structure that the seller has already established.

Firms that work with business owners preparing to sell my business, particularly those with revenues between five and one hundred million dollars, frequently cite proactive financial preparation as the single most impactful thing a seller can do to protect their multiple in a competitive process. Not the quality of their legal counsel. Not the breadth of the buyer pool. The quality of the financial story they arrive with.

The Multiple Is Not Fixed, It Floats on Confidence

One of the most consequential misunderstandings in private business transactions is the belief that the purchase multiple is determined by the market and applied mechanically to a normalized EBITDA figure. In reality, the multiple is a negotiated outcome that floats on a combination of factors, and one of the most underestimated is the buyer’s confidence in the numbers themselves.

A buyer looking at two companies with identical normalized EBITDA figures will offer a meaningfully different multiple to the company whose financials they find credible versus the one whose financials require extensive interpretation. This is not arbitrary. It is a rational response to risk. When a buyer cannot fully trust the earnings figure, they protect themselves with a lower entry price, a more aggressive working capital peg, a longer escrow period, or an earn-out structure that defers a portion of the proceeds contingent on future performance.

Each of these mechanisms transfers risk from the buyer back to the seller. They are not punishments. They are rational structures in the presence of uncertainty. The most effective way to reduce their prevalence in a deal is to reduce the uncertainty that triggers them.

The Pre-Sale Window That Most Owners Miss

The ideal window for beginning financial preparation in anticipation of a sale is two to three years before the intended exit date. This is not an arbitrary buffer. It reflects the practical reality that a buyer will request three to five years of historical financials, and the quality of those years is largely fixed by the time a deal process begins.

If a business owner begins cleaning up their financial presentation eighteen months before going to market, they can influence the most recent one or two years in the historical record. If they begin three years out, they can shape the majority of the period a buyer will scrutinize. If they wait until they are actively in a process, they are defending history rather than engineering credibility.

The preparation process itself involves several stages. An honest internal audit of current financial practices, identifying where owner-related expenses have been commingled with business operations. A reclassification of recurring expenses into the appropriate reporting categories. The establishment of consistent accounting policies that will hold across multiple reporting periods. The documentation of all anticipated addback items with supporting evidence organized and retrievable. And the development of a coherent management narrative that explains the business, its performance drivers, and the sustainability of its earnings in language a sophisticated buyer can evaluate.

Working with experienced business brokers in Canada who have a track record in mid-market sell-side preparation can accelerate this process significantly, particularly for business owners who have not been through a formal transaction before. The institutional knowledge of what buyers in specific industries and size ranges actually scrutinize is not something that can easily be replicated through general research.

The Credibility Multiple and Why Buyers Pay It

There is an informal concept in M&A advisory circles sometimes referred to as the credibility premium. It describes the additional multiple that a well-prepared, financially transparent business tends to command in a competitive process compared to a comparable business with messier presentation.

The mechanics of this premium are intuitive when examined through the buyer’s psychology. A buyer who sits down with a business’s financial package and finds it organized, consistent, well-documented, and proactively explanatory experiences something important: reduced anxiety. Acquisitions are high-stakes decisions. The individuals and investment committees making them are acutely aware of downside risk. When a seller’s presentation reduces perceived risk, the buyer’s required return adjusts accordingly, which manifests as a willingness to pay a higher price.

Robbinex, a business brokerage firm serving Canadian mid-market business owners, has built a portion of its advisory process around exactly this dynamic, working with sellers to prepare financials that not only survive diligence but actively build buyer confidence throughout the process.

The inverse is equally true. When a buyer encounters financial statements that require interpretation, when addbacks feel more like guesses than documented facts, when the numbers tell a slightly different story each time they are approached from a different angle, anxiety rises. And anxious buyers do not pay premiums. They build in discounts, conditions, and protective mechanisms that erode the seller’s net outcome.

What the Owner With $3M EBITDA Actually Needs to Hear

Return to the owner at the beginning of this piece. The one who tells friends his company does three million in EBITDA. He is not wrong, exactly. The business probably does generate something close to that figure in economic benefit to him as the owner. The problem is that three million in economic benefit to a current owner and three million in transferable, defensible, buyer-grade normalized EBITDA are meaningfully different concepts.

The transferable version asks a harder question: how much of this cash generation will survive the departure of the current owner, under new management, with no personal expenses, no related-party arrangements, and no discretionary owner decisions embedded in the cost structure?

When that question is answered rigorously and honestly, the number sometimes holds. The business genuinely generates three million in transferable value and the addbacks are clean and defensible. But more often, the rigorous answer produces a lower number, typically somewhere between fifteen and thirty percent lower than the informal version, and sometimes more.

The earlier that gap is identified, the more time exists to close it. Not through manipulation of the numbers, but through deliberate operational decisions, financial hygiene improvements, and documentation practices that make the true value of the business visible and legible to the people who will eventually be asked to pay for it.

A business that generates two million in rigorously defensible EBITDA with clean books, documented addbacks, consistent reporting, and a coherent earnings narrative will often command a higher absolute purchase price than a business claiming three million in EBITDA that collapses under scrutiny. The multiple applied to a credible number, by a buyer who trusts what they are seeing, frequently exceeds the multiple applied to an inflated number that generates anxiety and adversarial negotiation.

The owners who understand this earliest are the ones who arrive at closing with the outcome they expected. The ones who discover it in the diligence room are the ones who spend the flight home recalculating what the deal actually delivered.

For anyone considering a transition in the next several years, the work of preparing financials to withstand scrutiny is not a transaction cost. It is a value creation strategy. One that pays its highest returns not when the documents are assembled, but when a buyer looks across the table, absorbs what they are seeing, and decides that this is a business worth paying a premium to own.