Adjusting your financial statements is one of the most important steps in preparing a business for sale.
It is how buyers move from taxable income to true earning power. It is also how valuation takes shape.
Well prepared, well explained adjustments reduce friction, speed up diligence, and build trust. Poorly prepared adjustments do the opposite. They raise questions, slow deals, and introduce risk where it does not need to exist.
This process is not about inflating numbers. It is about clarity.
Why adjusted earnings matter
Most businesses are valued using a multiple of adjusted earnings. That adjusted figure reflects what the business would reasonably earn under new ownership.
Two terms come up most often.
Seller’s discretionary earnings (SDE)
Most commonly used for smaller, owner-operated businesses.
EBITDA
More commonly used for larger businesses with management teams in place.
The goal of adjusting your financials is to move from reported profit to one of these standardized measures so buyers can compare your business to others in the market.
What adjusting financials actually means
Most owners run their businesses in a tax-efficient way. That often includes personal expenses, owner perks, or one-time costs running through the business.
Those choices are reasonable. They just need to be separated from the underlying economics of the company.
Adjusting financials means removing or normalizing items that would not continue under a new owner so buyers can see the cash flow the business actually produces.
Common categories of adjustments
While every business is different, adjustments usually fall into a few broad categories.
Discretionary expenses
Expenses that benefited the owner personally rather than the business. Examples include personal vehicle costs, insurance, travel, or memberships that are not business-related.
Non-recurring items
One-time or unusual expenses that are unlikely to repeat, such as litigation, storm damage, or a major one-off project.
Non-operating income or expenses
Items unrelated to core operations, such as investment income or gains from selling unused assets.
Accounting items
Depreciation, amortization, interest, and income taxes are commonly adjusted to calculate SDE or EBITDA.
Adjustments that usually make sense
Examples of adjustments buyers commonly accept include:
Owner salary and related payroll taxes, depending on valuation method
Personal auto, insurance, medical, or travel expenses
One-time legal or professional fees
Personal meals and entertainment
Family payroll for individuals not active in the business
Start-up or build-out costs
Depreciation and amortization
Interest expense
Every adjustment should be tied to a specific line item and supported with documentation.
Adjustments buyers often reject
Some expenses may feel discretionary but still belong in the business.
Examples that are often not adjusted include:
Advertising or marketing that did not perform well
Employee wages that are higher than ideal but still real
Expenses that benefited the business in some way, even if indirectly
If an expense helped generate revenue, build relationships, or support operations, buyers are unlikely to remove it just because it was optional.
Items that require judgment
Some expenses sit in a gray area and require careful judgment.
Examples include:
Charitable contributions
Meals and entertainment
Travel with both business and personal elements
Memberships that may or may not have driven business
In these cases, partial adjustments are often appropriate. The key is honesty and consistency. If an expense was partly personal and partly business, adjust only the personal portion.
Normalizing to market rates
Some items should not be removed entirely but adjusted to market levels.
Common examples include:
Rent when the owner also owns the real estate
Salaries for working owners or family members
In these cases, the expense is adjusted up or down to reflect what a market replacement would cost.
How to prepare a clean list of adjustments
The cleanest way to prepare adjustments is to start with your general ledger.
Export a detailed profit and loss report into an editable spreadsheet. Do not work from PDFs or screenshots.
Then:
Highlight each adjustment directly on the ledger
Add a note explaining what the adjustment represents
Tie every adjustment to a specific line item and year
Avoid adjusting items older than two years unless they are truly significant
This level of organization makes diligence easier and builds credibility with buyers.
Best practices that protect value
A few principles matter more than any individual adjustment.
Be thorough
Every adjustment should be easy to verify. Sloppy adjustments invite scrutiny.
Be conservative
Aggressive adjustments increase perceived risk. Conservative adjustments often lead to smoother diligence and stronger buyer confidence.
Minimize the number of adjustments
Buyers notice how many adjustments you make, not just the dollar amount. A clean P&L with fewer adjustments signals a well run business.
Adjust only what appears on your P&L
You cannot adjust items that do not appear as expenses. Owner draws, for example, belong on the balance sheet, not the P&L.
Why this matters more than owners expect
Valuation is a function of risk.
When buyers trust the numbers, they move faster and push less. When they do not, they compensate with heavier diligence, tougher terms, or lower offers.
Adjusted financials are not just math. They are communication.
The bottom line
Adjusting financial statements is about showing the business as it truly operates, not as it appears for tax purposes.
Done early and done well, this process creates clarity, reduces friction, and preserves leverage.
At Rowan, we view adjusted financials as part of readiness. When the numbers are clear, owners stay in control of the process and the outcome.
Clarity creates confidence. Confidence creates better decisions.
If you're interested in finding out where you stand, take the Rowan Readiness Quiz for free today.
