How To Avoid Committing The Worst EBITDA Adjustment Mistakes Before Your Liquidity Event

6 min read

EBITDA Adjustments

EBITDA adjustments can either make or break your liquidity event.

What is EBITDA?  EBITDA is earnings before interest, taxes, depreciation, and amortization.

EBITDA adjustments that aren’t accurate can lose both the buyer’s trust and the deal.

On the flip side, the correct EBITDA adjustments that you miss can lower the value of your business. Said in another way, you’re leaving your hard-earned money on the table for the benefit of your buyer.

Who am I, and how do I know?

I was the kid who started his business right out of school with no money, experience, or team. I failed forward all day, every day. It was my grit and passion that kept me in the game long enough to experience success.

Success brought an unsolicited 7-figure offer. My gut instinct told me something wasn’t right. I said “no” to the 7-figure offer and “yes” to mastering the art of the sale.

Two years later, I said “yes” to a 9-figure offer.

I created a 9-step road map of preparation that gave me the certainty to capture maximum value. Today, I pay-it-forward and help business owners prepare through a 90-day program.

The 90-day program, called the Deep Wealth Experience, teaches you the 9-step road map. Along the way, you remove mistakes and have the certainty of capturing maximum value.

As you think about your liquidity event, do you know the five key areas for EBITDA adjustments to master?

Keep reading to learn how you can crush it and win for your liquidity event.

Why EBITDA Adjustments For Lifestyle Expenses Will Increase The Value Of Your Business

If you want to be an entrepreneur, it’s not a job, it’s a lifestyle – Niklas Zennstrom

Lifestyle EBITDA Adjustments

When it comes to EBITDA adjustments, find and identify lifestyle expenses.

Read Deal Value: What You Need To Know To Succeed And Prosper.

A benefit of owning your business is having your business pay for activities that you enjoy. Examples of lifestyle expenses include:

  • Seasons tickets to sporting or cultural events
  • Charitable donations
  • Travel
  • Properties
  • Excess machinery

When finding lifestyle expenses, ask yourself one simple question. What expenses would disappear if you were no longer running the company?

As an example, one business owner enjoyed buying new machinery every year. The business owner would tinker with the new machinery and figure out ways to apply it to his business.

The machinery is a legitimate business expense. The need for the business to buy new equipment each year is not. Buying the equipment each year lowers the profit of the business.

The business itself did not need the equipment for its daily operations.

In this instance, the removal of the year-over-year new equipment expenses is legitimate. The business’s profits go up, as does the value, and the business is not affected.

EBITDA adjustments for lifestyle expenses can be a two-edged sword.

Examples of EBITDA adjustments that get you in trouble include:

  • Slashing money spent on marketing
  • Cutting out expenses to replace aging equipment or infrastructure
  • Eliminating research and development

The above examples set off a red flag with your future buyer and can derail your deal. Please don’t do it.

When it comes to lifestyle EBITDA adjustments, be transparent and reasonable. You’ll earn the trust of your buyer, increase your value, and get the deal done.

Not Accounting For Intercompany Accounting Is Asking For Trouble

It is not the great temptations that ruin us; it is the little ones – John William De Forest

For EBITDA adjustments, not accounting for intercompany accounting is a big mistake.

Read 5 Costly Liquidity Event Mistakes That Will Make You Cry.

Intercompany accounting has many forms. The most common example is when one company records revenue from another company. The issue is that you own both companies.

Step eight of the 9-step roadmap has you identify the skeletons in your closet. The preparation that you perform exposes the skeletons in your closet that can cost you the deal.

It’s crucial to finish your preparation before starting your liquidity event.

When EBITDA adjustments are not made, you inflate both revenue and profits.

Look to your future buyer as smart, sophisticated, and experienced.  Your buyer will either ask or perform a quality of earnings report for your business.

EBITDA adjustments that don’t deal with intercompany accounting have one of two outcomes.

You’ll either have a large decrease in the value of your business or lose the deal itself.

The outcomes above are neither desirable nor necessary. In the world of mergers and acquisitions, the currency is trust. Lose the trust of your buyer and investment banker, and you’re done.

You can crush it and win on your liquidity event when you make the right EBITDA adjustments.

EBITDA Adjustments That Have You Crush It And Win Include Your Salary And Bonus

Be prepared and be honest – John Wooden

Salary EBITDA Adjustments

EBITDA adjustments that don’t include normalizing your take-home pay is a missed opportunity.

Read Perfect Advice You Need On How To Master Business Blind Spots.

One of the perks of owning your business is the lifestyle you create from your success. Your salary and bonus are a tribute to your commitment, passion, and vision for your business.

Most business owners enjoy a large salary and bonus. Your business is your kingdom, and you make the rules.

When you own and run the business, there’s no downside for lower profits due to your take-home pay. The rules of the game change when it’s time for your liquidity event.

When it comes to your take-home pay, EBITDA adjustments are a golden opportunity. Seize the opportunity and don’t look back.

EBITDA adjustments that take into account your take-home pay will increase profits. With increased profits comes a higher enterprise value.

The reality is that your future buyer will pay a CEO a lower amount than what you pay yourself. Part of your preparation is to learn what a reasonable compensation amount is for a CEO in your industry.

Better yet, if you’ve done your preparation, your business already runs with you, and you have a CEO.

A word of caution. Don’t take one step forward and ten steps back with EBITDA adjustments that are too generous.

On the flip side, if your take-home pay is below your industry’s standard, you need to address this issue. In this scenario, your profits decrease, but you keep your deal alive.

Ready to learn overlooked EBITDA adjustments that can make or break your deal?

Keep reading.

Do The Smart Thing And Ensure Your Rent Falls Within Market Norms

For success in life and business, always go the extra mile – Jeffrey Feldberg

To crush it and win with your EBITDA adjustments, ensure that your rent falls within market norms.

Do you own the building that you operate your business out of?

If you answered “yes” to the question, you’re not alone. Many business owners follow this smart strategy.

Before diving into EBITDA adjustments, here are some words for the wise. When it comes time for your liquidity event, ensure that you keep full ownership of your building. It keeps the deal simple and ensures passive income for years to come.

Read Practical Advice For How To Boost Your Company Valuation.

Many business owners to over-inflate the rent to lowers taxes for the business.

An over-inflated rental rate is low-hanging fruit for EBITDA adjustments. Normalizing the rental rate is a top priority for two reasons.

First, the profits of your business increase, as does the value. Second, normalizing the rental rate in advance creates goodwill with your future buyer.

In the world of mergers and acquisitions, the currency is trust. Small details, such as normalizing the rental rates, goes a long way in establishing trust.

EBITDA adjustments cut both ways. As an example, your rental rate is lower than market rates. In this instance, your business has over-inflated profits.

While the EBITDA adjustments lower your enterprise value, you earn the trust of the buyer.

Regardless of where your rental rate is, do the smart thing. Normalize your rental rate through EBITDA adjustments.

Next up is one overlooked area that increases the value for your business.

Do you know what this one area is and the EBITDA adjustments to make?

Keep reading.

Increase Your Enterprise Value With EBITDA Adjustments For Repairs, Maintenance, and Inventory

Three things cannot long be hidden: the sun, the moon, and the truth – Confucius

Inventory EBITDA Adjustments

When making EBITDA adjustments, don’t forget about your repairs, maintenance, and inventory.

Most business owners overstate repairs, maintenance, and inventory to reduce taxes.

Read This Is What Happens When You Do What Smart Sellers Do On Their Exits.

Reduced taxes are great when you’re running your business. When it comes time for your liquidity event, put the power of EBITDA adjustments to good use.

Normalize the amounts needed for repairs, maintenance, and inventory.

As you plan out your EBITDA adjustments, a word of caution. Your buyer is smart and has seen it all. Resist the temptation to take one step forward and ten steps back.

Suggesting an inventory level that is too low for the business to run on is not up for discussion.

Your business is your kingdom. You make the rules. While this philosophy is great when you own the business, the rules change you when you don’t.

Your philosophy of keeping excess inventory may have served you well in the past. Your best practice ensured you always had what your customers wanted when they wanted it.

While you were at it, you were never caught off-guard with a surprise order.

Your preference of overstocking your inventory year-over-year became a norm in your business. When it’s time to prepare for your liquidity event, it’s time to question each of the norms.

Lack of preparation has you overlook justified EBITDA adjustments that increase enterprise value.

The reality is that your oversight is your loss and your future buyer’s gain.

Be smart and capture all the EBITDA adjustments well in advance of your liquidity event.

Conclusion

Moderation is key to long-lasting success. EBITDA adjustments are no exception.

EBITDA adjustments are a powerful tool to increase the value of your business. When it comes time for your liquidity event, you have one chance to make it count.

Five crucial EBITDA adjustments help you achieve two important things.

First, you increase enterprise value in areas that you’re overspending for lifestyle reasons.

Second, EBITDA adjustments that lower enterprise value earn the trust of your buyer.

At the heart of EBITDA adjustments is taking the time and effort to prepare. The higher the quality of your preparation, the higher your enterprise value.

My journey had me create a 9-step road map of preparation, and at the same time, say “yes” to a 9-figure offer. It was no coincidence that the 9-step road map helped me grow my business. The right preparation helps you create a blueprint to optimize business value.

Today my mission is to help business owners level the playing field. The 90-day Deep Wealth Experience, grounded in the 9-step road map, is how I help business owners.

When you’re prepared, you have the certainty that you’ll capture the maximum value. When you know, instead of believe, you do the right thing at the right time.

Take the time now to review the five EBITDA adjustments that help you crush it and win on your liquidity event. Start with the first area and stay with it until you’ve mastered it. When done, move on to the next area until you’ve mastered all five.

The best time to prepare was years ago. The next best time is today. Whether your liquidity event is in one year or ten years, the time to prepare is today.

Here’s to you and your success.

Your Raving Fan,

Jeffrey Feldberg

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Don't Sell Your Company, Until You Discover The Fatal Mistakes Made by Most Sellers That You Must Avoid at All Costs.

SIGN UP AND RECEIVE:

* Free Exit eBook
* Proven exit strategies
*  How I achieve my 9-figur exit
* Your Midweek Wisdom Email
* Little known success principles

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