Every acquisition negotiation anchors to EBITDA. The multiple applied to that EBITDA determines the price. Which means the single most important analytical question in any deal is whether the EBITDA number you are using is actually representative of the earnings a buyer will receive.
Sellers present adjusted EBITDA that tells the most favorable story possible. Buyers need to arrive at a normalized EBITDA that reflects sustainable, transferable earnings. The gap between those two numbers is often where deals get done or fall apart.
What Adjustments Are Legitimate
Legitimate EBITDA adjustments add back genuine one-time items: legal settlements, one-time equipment purchases, extraordinary losses. They also normalize owner compensation to market rate, since a seller paying themselves above or below market creates an artificial picture of true profitability.
These adjustments are standard and accepted. The grey areas are where analysis matters: related party transactions, discretionary expenses blended with business expenses, revenue timing, and customer-specific arrangements that may not survive ownership transition.
Adjustments That Should Raise Flags
Not all adjustments presented by sellers are appropriate. Revenue pulled forward to improve the sale year earnings. Expenses deferred for the same reason. Customer contracts counted as recurring that are actually project based. These adjustments inflate the EBITDA figure without reflecting economic reality.
Identifying aggressive adjustments requires understanding the business well enough to evaluate whether each adjustment is legitimate. This is where the analytical work separates experienced buyers from first-time acquirers.
Working Capital and Quality of Earnings
Normalized EBITDA is only part of the financial analysis. Quality of earnings assessment evaluates whether the earnings are real, recurring, and transferable. Working capital analysis determines what investment the business requires to operate normally, which affects how much cash you actually get at close.
Both analyses require digging into the financials with institutional frameworks, not just reviewing the summary numbers a seller provides.
AI Assisted Financial Analysis for Every Deal
The SilverShore AI Financial Analyst and QoE Expert is trained on our Acquisition Playbook and Valuation Multiples Database. Upload a financial package and get normalized EBITDA analysis, working capital assessment, and deal risk identification using the same frameworks institutional buyers use.
It is free with a ChatGPT account. Use it to pressure-test the financial narrative before you commit to a price, and surface the questions you need answered before you sign anything.
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