My EBITDA is strong, so why would a buyer still question the quality of my earnings?

Question

Tyler Smith · Accepted Answer

Strong EBITDA is a starting point, not proof that earnings are dependable or available as cash. Buyers also need to understand how earnings were produced, whether they will continue and what investment the business requires to sustain them.

Built to Sell Radio emphasizes building strong EBITDA rather than relying on revenue alone to attract buyers. The complementary readiness principle is to assess financial strength and operational transferability separately. Healthy profits can coexist with unreliable reporting, owner dependence or weak cash-flow visibility.

Prepare to explain three things:
- Earnings credibility: Can you reconcile reported results to consistent financial records and support proposed adjustments?
- Earnings durability: Do profits depend on unusual projects, temporary savings or work the owner performs without a realistic replacement cost?
- Cash conversion: How do receivables, inventory, capital spending and other operating requirements affect the cash available from those earnings?

Treat owner-related adjustments carefully. Removing an owner's compensation expense without recognizing the cost of replacing necessary work can overstate the earnings a buyer would inherit. Similarly, calling an expense nonrecurring does not make it so without supporting evidence.

My recommendation is to prepare a documented bridge from reported results to proposed adjusted EBITDA, alongside a clear explanation of cash flow. Have your accountant or transaction adviser challenge the assumptions before buyers do. The objective is not the largest possible earnings figure. It is a defensible figure that helps a buyer understand the economics of owning the business.