Sell-Side Advisory · Quality of Earnings

EBITDA Normalization Dashboard

Reported · Adjusted · Seller's Discretionary Earnings — with multi-year averaging & valuation indication
§ 01

Engagement Setup

What goes here: Client name, what kind of business, and the periods you'll compare. Use 2 prior fiscal years plus a TTM (trailing twelve months) ending the most recent closed month — that's the standard "3-and-TTM" sell-side view. Click any period pill to exclude it from the average.
Periods Click a period label to include or exclude from averages
→ Workflow: §01 set company & periods · §02 paste P&L from QBO/Xero · §03 enter add-backs (use the cheat sheet) · §04 print the bridge for the client. Target time: 60–90 minutes for a clean book.
§ 02

Income Statement & Reported EBITDA

Step 1
Where the numbers come from: QBO → Reports → Profit and Loss, or Xero → Accounting → Reports → Profit & Loss. Use accrual basis. Pull each period as a column. Enter as positive numbers. The only exception: interest income or non-operating gains go on the Other Income line as a negative (because that line is treated as an expense). Reported EBITDA? is computed automatically — you don't enter it.

Enter book P&L figures from the trial balance or tax return. EBITDA is computed bottom-up from net income. Negative values are entered as negatives (interest income, gains, etc.).

Line Item Y1 Y2 Y3 Average
§ 03

EBITDA Adjustments & Add-Backs

Step 2
What goes here: Things that depress reported earnings but a new owner wouldn't keep paying for. Personal expenses run through the business, one-time legal fees, the owner paying themselves above market — these are add-backsAn adjustment that increases Reported EBITDA. Each one needs to be supportable, quantifiable, and defensible to a buyer's diligence team.. Most clients will only have items in Categories B and C. Don't force items into D or E.

Cheat sheet The 25 most common add-backs & decision rules

▼
AOwner Compensation
  • Owner W-2 / guaranteed payments (full)
  • Less: market-rate replacement comp (enter as negative)
  • Spouse / family salary above market
  • Owner-only health, life, disability premiums
  • Owner payroll taxes on the excess
BOwner-Discretionary
  • Personal vehicle, fuel, lease
  • Personal travel, meals, entertainment
  • Personal cell phone, home internet, subscriptions
  • Country club, gym, hobby memberships
  • Discretionary charitable contributions
  • Personal legal & tax-prep fees
CNon-Recurring
  • Legal settlements & defense costs
  • One-time bad debt write-off
  • Severance for closed roles
  • Prior failed transaction costs
  • Asset impairment / inventory write-down
  • COVID disruption / PPP / ERTC anomalies
DNon-Operating & Related-Party
  • Above-market related-party rent (positive)
  • Below-market rent (negative — reduces EBITDA)
  • Non-operating asset income / expense
  • Discontinued segment / sold business line
Decision rule — "Is this an add-back?" Ask three questions in order:
✓ Would a new owner stop paying for it? If yes → keep going. If no → not an add-back.
✓ Can you quantify it from the books? If yes → keep going. If you're guessing → don't include it.
✓ Could you defend it in a 5-minute conversation with the buyer? If yes → add it. If you'd be uncomfortable → leave it out.
Things to NEVER add back: ✗ Routine bad debt experience   ✗ Marketing that "didn't work"   ✗ Recurring litigation in a litigious customer base   ✗ Charitable giving that's part of a branded program   ✗ Projected (not yet contracted) future wins

Add-backs are entered as positive numbers. To reduce EBITDA — owner replacement comp in Category A or below-market related-party rent in Category D — enter a negative. The dashboard handles the SDE math automatically: SDE adds back the full owner comp (ignoring the replacement subtraction); Adjusted EBITDA only adds back the excess.

§ 04

EBITDA Bridge — Reported to Adjusted

Output
This is the deliverable. The line-by-line walk from Reported EBITDA → Adjusted EBITDA → SDE. Use Print/PDF when you're done — the right rail collapses below this for a clean two-page client-meeting handout. Lead with Adjusted EBITDABest for businesses with hired management or EBITDA over ~$750K. Implies the buyer will pay a market manager. for clients with hired management; lead with SDESeller's Discretionary Earnings. Best for owner-operated businesses under ~$750K. Implies the buyer becomes the operator. for owner-operators.

The full normalization bridge for the deliverable. Adjusted EBITDA is the buyer-relevant metric for businesses with hired management; SDE is preferred for owner-operated businesses where the buyer steps into the operator role.

Bridge Item Y1 Y2 Y3 Average
Disclaimer. This presentation is informal and prepared for management discussion only. The figures are based on unaudited financial information that has not been audited, reviewed, or compiled by an independent accountant in accordance with AICPA standards. Adjustments reflect management representations regarding items considered owner-discretionary, non-recurring, non-operating, or in need of normalization, and are subject to verification. This is not a Quality of Earnings report, a fairness opinion, or a valuation; final treatment of any individual add-back is subject to buyer diligence and negotiation. SDE is calculated as Adjusted EBITDA plus the full owner replacement compensation taken in Category A. Multi-year averages are simple unweighted means across the periods marked active above.
Adjusted EBITDA · Avg
$0
Reported $0 · Add-backs $0
Seller's Discretionary Earnings · Avg
$0
Adj. EBITDA + Owner Comp Replacement
Period Snapshot
Reported → Adjusted
Add-Back Composition · Avg
Valuation Indication
Apply EV/EBITDA multiples to selected basis
Low
3.5×
$0
Midpoint
5.0×
$0
High
6.5×
$0
Ranges are indicative only and do not reflect working capital pegs, debt-like items, transaction costs, or buyer-specific synergies.
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