Additions and Deductions

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Below is a list of potential discretionary items in the Income Statement that may be adjustments to EBITDA.
These adjustments may be either increases or decreases to EBITDA and may have a material impact on the valuation of the business:

See pages 54–56 of The Exit Strategy Handbook.

• Excessive compensation to owners, management and employees
• Personal legal costs for estate planning, divorce, personal litigation, etc.
• No income or below-market income to owners and management
• Tuition and educational expenses for children and family members
• Cash donations to charitable organizations
• Golf, country club or other such expenses not really necessary to the business
• Nepotism expenses (salary, autos, computers, vacations, etc.)
• Vacations or other related party travel expenses, including time-share expenses, etc.
• Multiple vehicles or unusual vehicle expenses for the owner, family, etc.
• Excessive insurance to owners and related parties (e.g., life, health, disability)
• Building rent paid to an owner that is in excess of or under market value
• Equipment leases paid to an owner that is in excess of or under market value
• Professional sports tickets not necessary for the business
• Rental expenses or repairs that would normally be paid by a landlord
• Hobbies such as buying jewelry, antique cars, etc.
• Below-market transfers of assets to related parties or family members
• Discounted sales prices to related parties, friends, etc.
• Costs paid in excess of market to vendors that are related parties or friends
• Discounts or free delivery given to related parties or friends
• Repairs, remodeling, maintenance, insurance or other expenses for a personal residence
• Inventory or scrap sold in cash and not deposited into the company's bank account
• Alimony or child-support payments made by the company
• Bonuses or other perks that are above-market costs, etc.

Below are examples of one-time, nonrecurring or unusual expenses that might be included in adjusted EBITDA:

• Maintenance capital expenditures
• IT capital expenditures
• Write-off of an unproductive or obsolete asset
• Unusual, one-time or prior period adjustments proposed by independent CPAs
• Legal expenses incurred for the exit strategy
• Legal costs of restructuring or reorganization
• Audit, appraisal or consulting fees for the exit strategy
• Litigation expenses that have concluded and are nonrecurring
• Costs of exits of minority owners prior to the sale of the company
• Insurance claims
• Opening a new facility
• Writing off inventory that is unusual or nonrecurring
• Unusual bad-debt expenses, such as a Chapter 11 bankruptcy filing by a customer
• Employment costs, such as large severance or other nonrecurring expenses
• Large and unusual bonuses or other compensation paid for nonrecurring transactions
• Differences between book and tax depreciation
• Professional fees, such as creating a Defined Contribution or Benefit Plan
• Leases that were expensed instead of being capitalized
• Equipment that was expensed instead of being capitalized
• One-time marketing, branding, public relations or research costs

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