In the world of M&A, "Adjusted EBITDA" is the holy grail. It's supposed to show the true, normalized earnings of a business. But sometimes, reading a founder's add-back schedule feels less like accounting and more like a creative writing workshop.
The Hall of Fame
We have seen it all. We once saw a founder try to add back his divorce settlement as a "one-time non-recurring expense." While technically true (we hope), it didn't exactly fly with the investment committee. Then there was the "marketing expense" that turned out to be a family trip to Disney World. (Unless Mickey Mouse is a key client, that's a no-go.)
Another classic is the "Owner's Personal Vehicle" add-back. We understand writing off the F-150 if you're a construction company. But writing off the lease on a McLaren because you "sometimes drive it to client meetings"? That's a stretch. And don't get us started on the "Consulting Fees" paid to the founder's teenage children for "social media management" that consists of three Instagram posts a year.
Good vs. Bad Add-Backs
To be clear, legitimate add-backs are fine. We want to see the true earning power of the business. Here is what we accept without blinking:
- One-time Professional Fees: The recruiter fee for that new VP of Sales, or the legal fees for a lawsuit that is now settled.
- Owner Compensation Adjustment: If you pay yourself $500k but a market-rate CEO would cost $200k, we will add back the difference.
- Discontinued Operations: Costs associated with a product line you shut down.
The Trust Factor
But when you start adding back "theoretical efficiencies" or "synergies we haven't achieved yet," you lose credibility. It signals that you are trying to hide something. It tells us that you view the due diligence process as a negotiation to be won, rather than a partnership to be built.
In our business, trust is the currency of the realm. If we catch you padding the numbers with creative fiction, we start to wonder what else you're hiding. Are the inventory counts real? Are the receivables collectible? So keep the creativity for your marketing campaigns, not your financial statements. A clean set of books is the sexiest thing you can show an investor.