Playbook18 min readFocus · August

EBITDA Quality Workbook

Add-backs, normalizations, and how a buyer will read your P&L.

Focus for August

Customer concentration math

August: a buyer will discount EBITDA from concentrated customers. Quantify it yourself.

Refreshes on the 1st of every month

Run the EBITDA contribution by customer (top 10) and by segment. Anything over 10% from a single customer needs a story; over 20% gets discounted in valuation. Better to show the math than to be ambushed by it.

Top-10 customer EBITDA contribution
Concentration > 10% / 20% flagged
Contracts and tenure documented
Diversification narrative drafted

What 'quality' actually means

Buyers don't just want EBITDA — they want EBITDA they believe will repeat. Quality is a story about how durable the number is, told through five lenses: recurrence, concentration, margin stability, working capital, and capex intensity.

Quality lens	What buyers test	Where you can improve
Recurrence	% revenue from contracted/repeat customers	Convert spot work to MSAs
Concentration	Top 1, 5, 10 customer % of revenue	Diversify or de-risk top accounts
Margin stability	GM trend, last 36 months	Standardize pricing, reduce one-offs
Working capital	Cash conversion cycle trend	Tighten DSO, manage DPO
Capex intensity	Maintenance capex / EBITDA	Distinguish maintenance vs. growth capex

Legitimate add-backs

What survives diligence and what gets struck.

Add-back	Survives?	Documentation needed
Owner comp above market	Yes	Comp study + market benchmarks
One-time legal (named matter)	Usually	Invoices + matter description
Discontinued product line	Yes	Standalone P&L of the line
ERP implementation	Yes (if truly one-time)	SOW + go-live date
'Marketing experiment'	Rarely	Hard to prove non-recurring
Owner perks (car, club, family on payroll)	Yes	Itemized list with amounts
Rent below market (related party)	Reverse — reduces EBITDA	Market rent appraisal

Normalizations buyers expect

Buyers will normalize whether you do it or not. Build the bridge yourself so the conversation is about your number, not theirs.

Owner comp normalized to market — both directions
Rent at fair market value (especially related-party leases)
Maintenance capex run-rate (3-year average minimum)
Working capital peg (typically trailing 12-month average)
Stock-based comp added back if not part of go-forward plan
One-time gains (asset sales, insurance recoveries) removed

Worked example

Worked example — EBITDA bridge

Reported EBITDA $4.2M → Add: owner comp normalization +$280k → Add: one-time legal +$190k → Add: ERP implementation +$340k → Less: related-party rent normalization -$120k → Adjusted EBITDA $4.89M. Show every line. Buyers reward transparency.

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