2/12 | Normalized EBITDA

Discovering Your Business's "True" Profit.
What is shown on your financial statements is almost never the number a buyer will use to calculate your check.

Why?
Because your accountant and your buyer have two very different missions.

In our previous article, we saw that your value depends on a multiple.
Today, we dive into the other half of the equation: your profit.
Specifically, your Normalized EBITDA.

The Clash of Objectives: Accountant vs. Buyer

To understand normalization, you must understand that two different visions are at play:

Your Accountant’s Goal: To minimize your taxes. They legitimately seek to maximize expenses to reduce taxable income.
The Buyer’s Goal: To see the "machine’s" real, transferable profitability. They want to know what profit the business would generate tomorrow if you were no longer there.

Normalization is the "cleaning" exercise that bridges the gap between fiscal profit and real operational profit.

"Add-backs": Dollars That Are Worth Their Weight in Gold

Every dollar you successfully "normalize" (add back to the profit) isn't just worth $1.
If your business sells at a 5x multiple, every dollar recovered here adds $5 to your sale price.

Here is what is typically added back to profit:

Personal Expenses: Your company car, travel expenses, subscriptions, or insurance paid by the company that are not essential to business operations.
Excess Salary: If you pay yourself $300,000 while a replacement manager would cost $150,000, the $150,000 difference is actually hidden profit.
One-time Expenses: A unique lawsuit, a major repair following a claim, or consulting fees for a specific project that will not recur.

Beware of the "Inflated" Profit Trap

The reverse is also true. A seasoned buyer will track down profits that are not sustainable. If you manage your business too conservatively just to "dress up" the financials, it will backfire:

Underpayment: If you pay yourself next to nothing to show record profits, the buyer will subtract a market-rate salary from your profit.
Lack of Investment: If you have cut marketing, neglected equipment maintenance, or frozen necessary hiring to inflate EBITDA, the buyer will adjust the numbers downward.

The goal is not to have the biggest possible number, but the most sustainable one.

Simon’s Tip: Normalization is not accounting manipulation; it is a search for the truth. The more documented and justifiable your normalization is, the more confidence the buyer will have in your numbers—and the less they will try to negotiate your multiple down.

Your Homework for This Week

Take out last year’s financial statements and identify two elements:

An "Add-back": A personal or exceptional expense that you could legitimately add back to the profit.
A "Missing" Expense: Be honest. If you had to hire someone tomorrow to do your job, how much would you have to subtract from your current profit?

Next article → 3/12: Value vs. Price. Why what you are "worth" on paper isn't always what you will actually be paid.