Before You Sign the LOI: Understand These Deal-Changing Adjustments
Understanding EBITDA adjustments and working capital targets isn’t optional—it’s essential. This video breaks down what those terms really mean, when they matter most, and how they can affect the final dollars in your deal. Watch it first, then read on for more detail.
When you’re selling your business, the letter of intent (LOI) isn’t the finish line. It’s the starting point for a series of financial and legal adjustments that can impact your final payout.
Here are the key adjustments you need to understand before signing anything.
EBITDA Adjustments
EBITDA—earnings before interest, taxes, depreciation, and amortization—is the starting point for most valuations. But it doesn’t end there.
Buyers will make several adjustments to arrive at “adjusted EBITDA,” including:
Owner salary: If you’re underpaid or overpaid relative to market, it gets corrected.
Related-party expenses: Rent paid to a building you own? That’s getting reviewed.
One-time costs: Expenses that won’t recur get added back.
Your buyer may challenge your adjustments. If they disagree, they’ll try to retrade the deal—offering less than originally agreed.
Working Capital Adjustments
Buyers want to know your business can run smoothly after closing. That means leaving behind enough working capital.
To estimate this:
Add accounts receivable and inventory
Subtract accounts payable
Most buyers expect at least 30 days’ worth of working capital. Too little, and they’ll lower their offer or delay closing.
Retrades and Earnouts
If a buyer lowers their offer late in the deal, that’s called a retrade.
Sometimes this happens because:
Due diligence reveals weaker numbers
The buyer’s assumptions change
They want leverage late in the process
You’ll need to decide if it’s worth accepting. If there are other bidders, you have more leverage.
Earnouts are another tool buyers use to manage risk. These are future payments based on your business hitting certain targets post-sale. They can work well—but they can also be manipulated or missed. Be cautious.
What to Do
Build your adjustments list early. Get ahead of buyer questions.
Test your working capital numbers. Don’t wait until closing to discover surprises.
Know your walk-away point. Understand when it’s better to move on than accept a bad deal.
Lean on your outside team. Your M&A attorney and transaction advisor have seen this before. Use their experience.
Bottom Line
Your LOI might look good on paper. But it’s the adjustments that shape your final outcome. Know them. Prepare for them. And don’t go it alone.
