What a buyer will do to your P&L

Every sale process reaches the same moment. You have run the business for fifteen years, you know what it earns, and a buyer hands you a schedule that says it earns something different.

That schedule is not usually a negotiating tactic. It is a quality of earnings analysis, and the adjustments in it are largely standard. Any competent buyer will make most of them, which means the useful question is not whether they are coming but whether you have already thought about them.

Five come up in nearly every rural ISP transaction.

1. Owner compensation

The most common and the most straightforward. Owner salary in a closely held business is set for tax reasons, not market reasons. It might be very low, with the owner taking distributions instead, or very high for the same reason in reverse. Family members may be on payroll at rates unrelated to the work.

A buyer normalizes all of it to what it would cost to employ someone to do the job. If you have been paying yourself sixty thousand to run a company that needs a two-hundred-thousand-dollar general manager, adjusted EBITDA goes down by the difference. That is not a buyer being difficult. It is the actual cost of the business operating without you in it.

Get ahead of it by knowing what a market-rate general manager costs in your geography, and being ready to say who on your team could do the job and what they would need to be paid.

2. Capitalized labor

This is the largest single adjustment we see in this industry, and the least understood by sellers.

When your own crew builds plant, their time can be capitalized to the asset rather than expensed. That is legitimate accounting. It also means labor cost leaves the income statement, and EBITDA rises by exactly the amount of internal construction you did that year.

The problem is that it makes EBITDA a function of how much you built, not how profitably you operate. In a year of heavy grant-funded construction, a business can post a materially higher EBITDA than the same business in a quiet year with identical operations. We have seen capitalized labor account for a share of reported EBITDA large enough that the operating business, stripped of it, looks like a different company.

A buyer will normalize it, because the buyer is pricing recurring operating cash flow rather than construction activity.

Get ahead of it by being able to show the capitalization policy, the hours behind it, and what a normal year looks like with the construction stripped out. If your build volume is genuinely recurring, that is an argument worth making, but you need the data to make it.

3. Related-party arrangements

Tower sites on family land. The office building owned by an LLC you also own. Vehicles leased from a related entity. Fibre on poles under an arrangement with a cooperative a relative sits on the board of.

None of this is improper, and much of it exists for sensible reasons. But a buyer has to price the business as it will run after close, at arm’s-length rates. If you are paying yourself below market rent, EBITDA goes down when it is normalized. If you are paying above, it goes up, and you should make sure the buyer catches that one too.

Get ahead of it by listing every related-party arrangement before diligence starts and having a view on what each one is worth at market. The ones that surprise a buyer in week six cost more than the ones disclosed in week one.

4. One-time costs that are not actually one-time

Every seller’s adjusted EBITDA schedule contains add-backs for extraordinary items. Some are real: a legal settlement, a storm event, a genuine one-off system migration.

Many are not. Truck replacements that happen every year to a different truck. Consulting spend that has appeared in each of the last four years. Grant application costs in a business that applies for grants continuously. Bad debt written off annually and described as unusual each time.

A buyer will test each add-back against three years of history, and anything that recurs comes back into the base. In our experience this is where the largest gap between a seller’s number and a buyer’s number usually sits, and it is almost always in the seller’s favour before it is tested.

Get ahead of it by applying the three-year test to your own schedule first. If it happened three years running, it is not one-time, and defending it damages your credibility on the add-backs that are genuine.

5. The depreciation double count

This one is not a negotiation. It is an error, it appears more often than it should, and it usually favours the seller until somebody catches it.

Adjusted EBITDA adds depreciation and amortization back to net income. That is the definition. The mistake happens when the financial periods being combined do not all book D&A consistently, most often when a trailing-twelve-month figure assembled from partial-year statements picks up a full year’s depreciation add-back against a partial year of expense. The result is an EBITDA figure inflated by an amount that has no operational meaning at all.

We have seen it in seller-prepared schedules, in schedules prepared by the seller’s own accountant, and in one case in our own early work on a deal before we caught it. It is easy to make and easy to find.

Get ahead of it by reconciling your adjusted EBITDA back to the statements period by period, and confirming that every period booking a D&A add-back also expensed D&A in the same period.

The point of knowing all this

A seller who walks into diligence having already normalized their own P&L is in a substantially better position than one who has not, for three reasons that have nothing to do with negotiation.

The number is more likely to hold. Adjustments a buyer discovers late feel like problems and get priced conservatively. Adjustments disclosed early get discussed on the merits.

The process is faster. Most diligence delay in transactions this size is not analysis, it is waiting for information that should have existed before the process started.

And you find out early whether the price you have in your head is the price the business supports. That is worth knowing before you have spent four months and paid an advisor, whoever ends up buying it.