8 Adjustments That Lower Your Adjusted EBITDA

Most owners preparing to sell build a list of adjustments that push earnings up. Almost nobody builds the other list. A buyer's quality of earnings team builds both, and the downward adjustments are the ones that surface three weeks before closing.

Adjusted EBITDA is earnings before interest, taxes, depreciation, and amortization, corrected for items a new owner will not carry. That correction runs in both directions. It is supposed to be a normalized number, not a favorable one. If your schedule only moves in one direction, a buyer's accountant knows it was built to sell rather than to be accurate, and that colors how they read every line you did present.

The eight downward adjustments, largest first

1. A below-market owner salary

The largest downward adjustment in most owner-led businesses. Pay yourself $60,000 to run a company that would need a $180,000 general manager and a buyer subtracts the $120,000 difference. Your low salary was never earnings, it was a tax and cash decision. Owners who have never priced their own role are usually surprised how big this one is, and it is knowable today from any comp survey.

2. Accrued liabilities that never made it onto the books

Cash-basis and partially accrual books hide real obligations: unused PTO owed to staff, earned but unpaid bonuses, warranty and rework exposure, unbilled vendor work, sales tax nobody flagged. A buyer's team accrues all of it, which lowers earnings and often reappears as a price reduction at closing. A real monthly close with an accrual review catches these while they are still small.

3. Capital spending running below depreciation

Buyers compare what you actually spend on trucks, machines, and systems against depreciation expense. Several years of underspending is not efficiency, it is a bill you deferred, and it returns as lower earnings or a holdback. Track maintenance capex separately from growth capex so you can show a buyer which is which instead of letting them assume the worst.

4. Related-party rent set below market

If your operating company leases from a building entity you also own and you have kept rent low to move cash, a buyer normalizes it upward to arm's length market rent. That is a straight reduction in earnings, and on a warehouse or shop it reaches six figures a year. Get a broker's opinion of market rent before you go to market so the number is yours.

5. Revenue recognized before it was earned

Revenue booked before it was earned gets pushed into a later period, which lowers the trailing twelve months a buyer is pricing. Customer deposits booked as revenue, annual contracts recognized on receipt instead of over the service period, project work billed ahead of the work performed. Cash-basis books make all of it invisible. A buyer's team restates the whole period onto accrual, and the shift is often six figures in a project or subscription business.

6. Receivables that are not going to be collected

An aging report with $140,000 past 120 days and no allowance for doubtful accounts is not a $140,000 asset. Buyers write down what is unlikely to collect and take it out of earnings and working capital both. Review aging monthly, write off what is dead, carry a reasonable allowance. Lower profit today, protected price later.

7. Inventory on the books but not on the shelf

Shrink, damage, and obsolete stock carried at original cost inflate both margin and the balance sheet. If you have not counted in a year, some of that inventory does not exist or cannot be sold, and buyers discount or exclude it. Cycle counts and an honest obsolescence reserve turn a diligence fight into a number you already disclosed.

8. Roles you are covering for free

If you personally handle the controller work, the estimating, or the biggest customer relationship, the buyer has to hire for those functions and subtracts the cost. This compounds with the salary adjustment, and it is why owner dependence is a financial issue rather than a management one. Name the roles you absorb and price them.

Why volunteering these strengthens your position

Presenting the downward adjustments yourself makes your upward add-backs more believable, because a schedule that cuts both ways reads as accuracy rather than a pitch. It also removes the retrade, since a buyer cannot renegotiate on something you disclosed in the first meeting.

One threshold worth knowing: once total adjustments run past roughly 15 to 20 percent of adjusted earnings, buyers tend to discount the whole schedule instead of arguing line by line. A defensible number beats a higher one you have to defend under exclusivity, when there is rarely a competing offer left to protect you.

None of these eight require a transaction to find. They require a real monthly close and someone reading the balance sheet as carefully as the income statement.

Where Thryve fits

Every adjustment on this list is an accounting question before it is a deal question. Clean accrual books, a real monthly close, an accrual review that catches liabilities early, and a schedule that moves in both directions are what make your earnings number hold up under someone else's scrutiny.

That is the work we do with owners one to three years out from a sale. When it is time to run the transaction, Texas Exit Advisors handles the sell-side process and the buyer competition that protects your price.

Last reviewed: August 2026. This article is general information, not tax, legal, or accounting advice for your situation. Talk through specifics with your accountant before making decisions about a sale.