Management vs diligence adjustments, explained simply
The seller presents its case first. The diligence team then tests each item for documentation, recurrence, measurement and consistency across years. Some are accepted, some rejected, and new adjustments the seller did not mention are usually identified, most often reducing EBITDA.
An item-by-item comparison makes the negotiation factual.
Adjustments by item: management and diligence views
IllustrativeAlder Creek Manufacturing, last twelve months, $ millions
Management proposes +$0.75m. Diligence supports −$0.40m.
Typical adjustments
Adjustments fall into a small number of categories. Each is supported by documents, and is proposed by management or identified by the diligence team.
| Category | Examples | Typical treatment |
|---|---|---|
| Owner compensation | Salary or bonus above or below market, family members on the payroll | Normalized to the cost of a replacement |
| One-off costs | Legal settlements, relocation, restructuring, costs of the sale | Added back if documented and non-recurring |
| Related-party and non-operating items | Below-market rent from the owner, personal expenses, investment income | Moved to market terms or removed |
| Accrual and cut-off corrections | Unrecorded bonuses, revenue or costs recorded in the wrong period | Corrected to the right period |
| Pro forma changes | Signed price increases, new hires, closed locations, acquired businesses | Included only where supported |
Worked example
| $ millions | Management | Diligence | Difference |
|---|---|---|---|
| Legal settlement | 0.30 | 0.30 | — |
| Owner salary above market | 0.25 | 0.25 | — |
| Annual trade show | 0.20 | — | (0.20) |
| Gain on equipment sale | — | (0.60) | (0.60) |
| Unrecorded bonuses | — | (0.20) | (0.20) |
| Below-market rent to owner | — | (0.15) | (0.15) |
| Total adjustments | 0.75 | (0.40) | (1.15) |
| Adjusted EBITDA (reported 5.00) | 5.75 | 4.60 | (1.15) |
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
How each adjustment is assessed
- Is it supported by documents?
- Is it genuinely non-recurring, or will it not continue under new ownership?
- Is the amount measured correctly?
- Is it applied consistently across periods?
Why it matters in a deal
The difference between the two columns is often the center of the price negotiation. A transparent, item-level comparison keeps the discussion on evidence.
Red flags
- Management adjustments with no supporting documents
- No negative adjustments in the seller’s list
- Adjustments that change between drafts