How much of the seller's adjusted EBITDA will survive diligence?
List the add-backs in the CIM, tag each one by category and how well it is supported, and see adjusted EBITDA and implied price the way the seller, a lender and a quality-of-earnings review would each count it. The gap is the price at risk.
Enter add-backs as positive amounts and adjustments that reduce EBITDA (under-market rent, missing costs) as negative amounts. Negative adjustments count in every view.
- Net add-backs are 32% of reported EBITDA. Above 20% is where buyers and lenders start discounting the adjusted number.
- $680K of pro forma / run-rate add-backs (14% of EBITDA) has not yet shown up in actuals. Lenders typically exclude or cap it.
- $680K of add-backs is marked aggressive or unsupported, worth $4.76M at 7.0x.
Net adjustments by category
Seller view, before any haircut. Negative bars reduce EBITDA.
Each adjustment at the multiple
| Adjustment | Support | Amount | At 7.0x | Lender | Buyer |
|---|---|---|---|---|---|
| Owner salary above market CEO replacement costOwner compensation | Documented | $350K | $2.45M | ✓ | ✓ |
| Family members on payroll, not working in the businessOwner compensation | Supportable | $120K | $840K | ✓ | – |
| Legal settlement with former distributorOne-time / non-recurring | Documented | $275K | $1.93M | ✓ | ✓ |
| ERP implementation consultantsOne-time / non-recurring | Supportable | $180K | $1.26M | ✓ | – |
| Below-market rent on owner-held warehouseRelated-party | Documented | −$90K | −$630K | ✓ | ✓ |
| Run-rate savings from planned headcount cutsPro forma / run-rate | Aggressive / unsupported | $300K | $2.1M | – | – |
| Full-year effect of new customer signed in Q4Pro forma / run-rate | Aggressive / unsupported | $380K | $2.66M | – | – |
| Inventory reserve true-upAccounting normalization | Supportable | $60K | $420K | ✓ | – |
| Net adjustments | $1.58M | $11.03M | $895K | $535K |
What to ask for in diligence
Per category, the support a QoE provider or lender will expect to see.
- Owner compensation ($120K not yet documented): Payroll registers and W-2s for the owner and family, plus a market benchmark for the replacement salary, bonus and benefits the buyer will actually pay.
- One-time / non-recurring ($180K not yet documented): Invoices, settlement agreements or contracts for each item, and three years of GL detail to show the cost has not recurred under another name.
- Related-party: Copies of related-party leases and agreements, a third-party market rent or price study, and confirmation of the terms that will apply after close.
- Pro forma / run-rate ($680K not yet documented): Signed contracts, executed headcount changes or vendor quotes behind each run-rate claim, the cost to achieve it, and the month it shows up in actuals.
- Accounting normalization ($60K not yet documented): The accounting policy before and after, the calculation of the true-up, and whether prior periods would be restated on the same basis.
Acquifolio’s evidence register links every adjustment to its source document, page and reviewer, so the number your IC sees is defensible.
Support levels and the view rules are a screening convention, not a QoE. Lenders and buyers apply their own definitions. Not investment, tax or legal advice. Everything runs in your browser and nothing you enter is stored or sent.
How it works
Each adjustment is added to reported EBITDA. Add-backs are positive; adjustments that reduce earnings, such as below-market related-party rent, are negative and count in every view.
- Seller view:
reported EBITDA + all adjustments. - Lender view: documented and supportable adjustments, excluding pro forma / run-rate items, plus all negative adjustments.
- Buyer / QoE view: documented adjustments only, plus all negative adjustments.
Implied price is adjusted EBITDA × multiple, and price at risk = seller price − buyer price. Net add-backs above 20% of reported EBITDA are flagged for attention and above 35% as a risk.
Questions
What EBITDA add-backs are usually accepted?+
Excess owner compensation measured against a market replacement salary, clearly non-recurring costs such as a one-off legal settlement or a completed system implementation, and related-party costs normalized to market terms are the most commonly accepted, provided they are documented. Run-rate savings, synergies and full-year effects of recent contracts are the most often rejected or capped.
How much of adjusted EBITDA can be add-backs?+
There is no fixed rule, but when net add-backs exceed roughly 20% of reported EBITDA, buyers and lenders start to discount the adjusted figure, and above 35% a full quality-of-earnings review usually removes a meaningful share. Many credit agreements cap pro forma cost savings at 10–25% of EBITDA.
Why do lenders exclude pro forma adjustments?+
Pro forma and run-rate adjustments describe earnings that have not yet appeared in the historical financials. Lenders size debt on cash flow that can service it from day one, so they typically exclude these items or allow them only within a negotiated cap and time window.
Should negative adjustments be included?+
Yes. A credible adjusted EBITDA includes adjustments that reduce earnings, such as under-market rent paid to an owner, unrecorded accruals, deferred maintenance or below-market salaries for family members. A list with no negative adjustments is itself a diligence flag.
How does the price at risk help in negotiation?+
It translates the disputed add-backs into enterprise value at the multiple being discussed, which shows the seller what each unsupported item costs them. It also tells you where to focus diligence spend and whether to propose an earn-out or escrow for the contested amount.
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