There’s a moment in every M&A journey when the spreadsheets get real.
It’s not when you sign the LOI. It’s not even during diligence. It’s the moment when you sit across from a strategic or financial buyer, and they ask:
“Can you walk me through your EBITDA adjustments?”
If your financials aren’t normalized—if you haven’t prepped your addbacks, aligned your accounts, and scrubbed out the noise—you’re in trouble. You’re no longer selling a dream. You’re defending a number. And in that moment, credibility is currency.
As someone who has gone through multiple exits and now helps founders do the same at Legacy Advisors, I can tell you this:
Normalizing your financials is one of the highest-leverage steps in the exit process—and one of the most overlooked.
In this article, I’ll break down what normalization is, why it matters, how to do it, and how to avoid the traps that can kill deals or crush valuation.
Let’s go.
What Does It Mean to Normalize Financials?
Normalization is the process of adjusting your historical financial statements to reflect the true, recurring, and future-ready economic performance of your business.
In simpler terms:
It’s cleaning up your books to show buyers what your business really earns—once you strip out the noise.
Normalized financials help buyers:
- Understand EBITDA with greater clarity
- Compare apples-to-apples across deals
- Remove founder-related distortions
- Spot risks and opportunities
- Justify valuation and structure
It’s not about gaming the numbers. It’s about telling the truth in a way buyers can believe—and invest in.
Why Normalization Matters in M&A
When buyers evaluate your business, they aren’t just reading your P&L. They’re reverse-engineering your company’s future cash flows.
If your reported EBITDA is $2.4 million, but $400K of that is from one-off revenue, or you buried $150K in personal expenses across 17 accounts, you’re starting off on the wrong foot.
Normalization affects:
- Valuation: The multiple applies to normalized EBITDA—not whatever’s on your tax return.
- Deal Structure: The more credible your numbers, the more likely you are to get cash at close vs. earnout or seller note.
- Buyer Trust: Clean, well-supported adjustments build confidence. Sloppy ones raise flags.
- Diligence Timeline: A well-prepped financial package reduces rework, costs, and deal fatigue.
It’s one of the best ways to take control of your narrative before buyers write their own.
When Should You Normalize?
Answer: Well before you go to market.
At Legacy Advisors, we recommend starting 12–24 months before a sale. That gives you time to:
- Clean up your chart of accounts
- Reclassify key transactions
- Build support for addbacks
- Improve EBITDA trends over time
- Work out any balance sheet issues
- Reduce surprises in diligence
If you wait until the buyer requests a Quality of Earnings (QOE) report, you’ve already lost ground.
Think of it this way:
You can normalize your financials—or they’ll get normalized for you. And trust me, buyers are conservative when left to their own assumptions.
What Should You Normalize?
Here’s a high-level framework of what to adjust:
1. One-Time Revenue or Expenses
Strip out things that won’t recur post-close.
Examples:
- PPP loans or COVID relief
- Legal settlements
- Sale of old equipment
- Unusual bonuses or severance
- Consultant fees for a temporary issue
- One-off software implementations
These are real, but not repeatable. Buyers are paying for future profits, not past noise.
2. Owner-Related Discretionary Items
Founders often run personal expenses through the business. That’s fine—but in M&A, you need to cleanly identify them.
Examples:
- Personal travel
- Luxury office perks
- Car leases
- Charitable contributions
- Family member salaries above market
These can be legitimate addbacks, but only if you can document and defend them.
Pro tip: Start tracking these in dedicated GL accounts at least a year in advance. “Trust me” is not a strategy that holds up in diligence.
3. Non-Recurring Revenue
Sometimes founders chase a whale—or win a one-time project—that inflates revenue.
Examples:
- A massive deal with a customer who won’t renew
- Government grants
- Project-based work that isn’t core to the model
You may be proud of those wins, but don’t expect buyers to pay a multiple on them.
In fact, some buyers will pull them out even if you don’t—so it’s better to be transparent up front.
4. Under-Market Compensation
If you’ve been paying yourself or your leadership team below market rates, buyers will adjust for that.
Let’s say:
- You’re paying yourself $100K
- A buyer would need to hire a replacement CEO at $250K
That $150K delta needs to be accounted for against your EBITDA. It’s a negative addback, and many founders miss it.
Same goes for:
- Marketing leads
- CFO or fractional finance roles
- Sales managers
Know your true replacement costs.
5. Over-Market Expenses That Will Go Away
Conversely, if you’re paying over-market for something you’ll eliminate post-sale, that’s a valid positive addback.
Examples:
- Legacy lease you’re about to exit
- High-interest debt being refinanced
- Redundant software systems
- Agencies replaced by in-house teams
Buyers like to see efficiency gains they can unlock. Show them where they exist.
How to Normalize Step-by-Step
At Legacy Advisors, here’s how we walk clients through normalization:
Step 1: Build a Clean Financial Package
That includes:
- Income Statement (3 years + TTM)
- Balance Sheet
- Cash Flow
- Chart of Accounts
- Supporting schedules
Step 2: Identify Potential Adjustments
We comb through your financials looking for anomalies, founder-related items, and one-time spikes.
Step 3: Create an Addbacks Schedule
This is a line-by-line breakdown of every adjustment, including:
- Description
- Dollar amount
- Time period
- Rationale
- GL backup (if needed)
Step 4: Defend Each Addback
Every adjustment should be supportable and logical. We coach you on how to frame the narrative for buyers.
Step 5: Tie to QOE
If a third-party QOE is being prepared, we make sure your adjustments are reflected in their analysis—and align with the story we’re telling in the Confidential Information Memorandum (CIM).
Addback Examples from Real Deals
Here are a few anonymized examples we’ve helped founders structure:
- $180K Legal Settlement (Addback): One-time lawsuit, fully resolved. Moved EBITDA from $1.12M to $1.3M.
- $75K Founder Retreat (Addback): Annual offsite to Bora Bora, not expected to continue.
- $225K Consulting Fees (Non-Addback): Recurring advisors required for ongoing compliance. We advised against including it—buyers would push back.
- $50K Marketing Test (Addback): Failed ad campaign in a new market. Clear rationale, supported by one-time PO and results.
The difference between a good deal and a great deal is often the nuance in these adjustments.
Mistakes Founders Make When Normalizing
Here are the red flags we see too often:
- Overreaching Addbacks: Including normal business costs as adjustments.
- No Documentation: Buyers won’t believe it if you can’t prove it.
- Timing Mismatches: Trying to add back expenses that occurred outside the reported period.
- Lack of Segmentation: Grouping addbacks into one large line item. Break them out individually.
- Inconsistent Treatment: Applying different rules to similar transactions. This kills trust.
The biggest mistake? Waiting too long. If your financials aren’t normalized before the buyer shows up, the power dynamic shifts—and not in your favor.
How Normalization Impacts Valuation
Buyers use normalized EBITDA as the basis for valuation. If your normalized EBITDA is higher than your reported EBITDA—and well supported—you’ve just increased your sale price.
Let’s look at an example:
| Amount | |
|---|---|
| Reported EBITDA | $1,000,000 |
| Addbacks (Verified) | $350,000 |
| Normalized EBITDA | $1,350,000 |
| Multiple (6x) | 6x |
| Implied Enterprise Value | $8.1M |
Without normalization, you might have accepted $6M. That’s a $2.1M delta—just from telling your story better.
How Legacy Advisors Helps
When you work with us, normalization is not an afterthought—it’s a core part of your exit prep.
We’ll help you:
- Identify legitimate addbacks
- Structure a compelling financial story
- Align your addbacks with industry benchmarks
- Avoid pushback during diligence
- Integrate with your QOE and CIM
It’s not about making numbers look pretty. It’s about helping buyers see what’s real—and what’s worth paying for.
Final Thought
Your numbers tell a story. But if you haven’t normalized them, that story might be distorted, confusing, or incomplete.
Normalization isn’t financial manipulation—it’s financial storytelling done right.
If you want to control your valuation narrative, drive better deal terms, and reduce friction in diligence, start now.
Because when the buyer asks about your EBITDA adjustments, you want to do more than explain.
You want to lead.
Frequently Asked Questions About Normalize Your Financials Before a Sale
What does it actually mean to “normalize” financials?
To normalize your financials means to adjust your company’s historical financial statements so they accurately reflect the true, ongoing earnings potential of your business. This process strips out one-time, non-recurring, discretionary, or personal expenses that distort the company’s actual profitability. It also accounts for anomalies like owner-specific compensation or unrelated project revenue. The result is a clearer picture of what a buyer can expect in terms of sustainable profit after the transaction closes. Normalization is not about inflating numbers—it’s about clarifying them. Done right, it makes you more credible and strengthens your position at the negotiating table.
Why is normalization so important when selling a business?
Normalization is critical because buyers are investing in what your business will earn in the future, not what it earned in the past—especially not if those past earnings were artificially inflated or suppressed. If your books aren’t normalized, buyers will assume risk and apply discounts. Worse, if they uncover discrepancies during diligence that you didn’t disclose, it can erode trust and derail the deal. On the flip side, when you walk into a deal with clean, defensible, normalized financials, you build buyer confidence, speed up diligence, and maximize your valuation by clearly showing your business’s true economic power.
What are examples of common addbacks in financial normalization?
Common addbacks include owner perks like personal travel or car expenses, one-time legal fees, non-recurring consulting services, severance payments, or the cost of a marketing campaign that won’t be repeated. Founders often overlook things like family members on payroll at inflated rates or professional development expenses that are more personal than business-related. A good rule of thumb: if the cost won’t exist once the company changes hands, and it wasn’t necessary to operate the core business, it may be a valid addback. However, the key is to track and document these items clearly—buyers won’t just take your word for it.
Can I normalize my financials on my own, or should I hire an expert?
While you can begin identifying potential adjustments on your own, normalization is not something you should fully DIY—especially in a multi-million-dollar transaction. You need to understand what qualifies as a valid addback, how to defend it, and how buyers will scrutinize it. Missteps here can cost you real money or trigger retrades. An M&A advisor like Legacy Advisors can help you structure your addbacks strategically, align them with industry norms, and prepare detailed schedules that support your valuation. We also coordinate with QOE providers to ensure your story flows across all deal materials. You don’t just need clean numbers—you need a narrative.
How far in advance should I start normalizing my financials?
Ideally, 12 to 24 months before going to market. This gives you time to restructure your chart of accounts, begin tracking discretionary spending in a transparent way, and generate clean financials over multiple reporting periods. If you start normalization early, you’ll have a clearer picture of your true profitability—and more time to fix any issues that could negatively impact your valuation. Normalizing late in the game, especially during diligence, creates risk. Buyers may see a last-minute cleanup as reactive or manipulative. Early normalization puts you in control of the process and strengthens your negotiating position.