Browsing listings for a business to buy, it’s tempting to treat the advertised cash flow figure, often labeled adjusted EBITDA or Seller’s Discretionary Earnings, as a settled fact: this business generates this much money, full stop. In practice, that number is almost always a starting point for negotiation rather than a verified figure, and understanding why is one of the more valuable things a prospective buyer can learn before making an offer.
How Common Is This Gap, Really?
According to due diligence data reported by CLA (CliftonLarsonAllen), a national accounting and advisory firm, adjusted EBITDA in owner-operated businesses can differ from reported EBITDA by 30 to 50 percent or more once a buyer’s independent review is complete. Separately, industry analysis of add-back practices in sale processes has found that add-backs, the adjustments sellers make to reported earnings to reflect what they consider the “true” ongoing profitability of the business, average roughly 29 percent of adjusted EBITDA across typical middle-market deal processes. In plain terms: a meaningful chunk of the earnings figure attached to almost any listing is the seller’s interpretation of the numbers, not a number that’s been independently confirmed.
This isn’t necessarily a sign of dishonesty. Most sellers genuinely believe their add-backs are legitimate: personal expenses run through the business, one-time legal fees, above-market compensation paid to a family member, or a non-recurring project that inflated one year’s revenue. The issue is that “legitimate” and “well-documented” aren’t always the same thing, and the gap between them is exactly where negotiations tend to happen after an offer is made.
What Actually Gets Challenged
A handful of categories account for most of the disputes that come up once a buyer looks closely at a listing’s financials:
Personal expenses run through the business. Nearly every privately owned company has some level of this, a vehicle, a portion of a cell phone bill, meals that blend business and personal use. On its own, this is normal and expected. The problem arises when these add-backs aren’t backed by clear documentation like receipts or credit card statements, which makes it hard for a buyer to verify how much of the claimed adjustment is actually legitimate.
Above-market compensation adjustments. Sellers often add back the portion of their own salary, or a family member’s salary, that exceeds what the market would actually pay to replace that role. This is a standard and generally accepted adjustment, but it becomes contested when the “market rate” comparison is vague or unsupported.
One-time or non-recurring items that aren’t actually one-time. A legal settlement, an unusual bad debt writeoff, or a pandemic-era anomaly might genuinely be non-recurring. But when a business claims several “one-time” adjustments across multiple years, buyers reasonably start to question whether those events are actually recurring, just described differently each time.
Revenue recognition timing. Some listings present revenue in ways that flatter a single period, recognizing a subscription payment entirely upfront rather than spread across its term, for instance, which inflates the picture of a single year’s performance relative to how sustainable that revenue actually is going forward.
Why This Matters More on Larger or More Complex Deals
For a small, simple business, the gap between listed and verified earnings tends to be modest and resolvable through basic financial review. On larger transactions, and especially those involving SBA financing, this gap becomes formalized. Lenders on many SBA-backed deals now require a quality of earnings review, an independent accounting analysis that verifies whether a business’s reported earnings are accurate and repeatable, specifically because the loan amount is sized against that earnings figure. If a quality of earnings review finds that add-backs were unsupported, it can reduce both the purchase price a buyer is willing to pay and the loan amount a lender is willing to approve, sometimes significantly.
What This Means for Reviewing a Specific Listing
None of this means every listing’s numbers should be treated with suspicion. It means the advertised cash flow figure is best understood as a claim to be verified, not a fact to be accepted. Before getting attached to a specific listing’s numbers, a buyer benefits from asking pointed questions early: what documentation supports the add-backs, how many of the “one-time” adjustments have shown up in prior years as well, and whether revenue and expenses are being recognized in a way that reflects genuinely repeatable performance.
For anyone actively working through listings to figure out which ones hold up to that kind of scrutiny, browsing options for a business for sale is really just the first step. The more important work happens after a listing catches someone’s interest, when the advertised numbers get tested against real documentation rather than taken at face value.
The Bottom Line
The earnings figure attached to a business listing is a negotiating position dressed up as a fact, and the gap between what’s advertised and what actually holds up under scrutiny can be substantial, sometimes 30 percent or more once independently reviewed. Buyers who understand this going in are far better positioned to negotiate from an informed place, rather than anchoring emotionally to a number that was never fully verified in the first place.
