The EBITDA Reconciliation: Turning Seller Earnings Into Buyer Reality
A Davenport buyer signed a letter of intent for a seven-truck route business at $1,395,000. The broker's package showed $331,600 of EBITDA, a 4.2x multiple, and a DSCR of 1.68x on a $1,255,500 SBA loan. He paid his attorney a retainer the same week. This is a composite example built from typical deals, not a single client.
Nobody had rebuilt the $331,600. The seller's books and the seller's broker assembled it, and it went into the offer untouched.
When a CPA rebuilt it from the general ledger, settlement statements, and payroll records, the figure that held up was $206,100. On the same loan, DSCR was 1.05x. The price was based on earnings that were $125,500 too high.
The Belief: The Seller's EBITDA Is the Starting Point
Most buyers treat the broker's EBITDA as a fixed input and negotiate the multiple. That makes sense on the surface. The package looks professional; it ties to the top line of the tax returns, and the broker has sold routes before. Haggling over 4.2x versus 3.8x feels like negotiating.
The multiple is not where the money is. A 4.2x multiple on $331,600 is $1,392,720, which rounds to the asking price. The same 4.2x on $206,100 is $865,620. The $527,100 gap comes entirely from earnings, and no amount of bargaining over the multiple recovers it.
Metric | Seller's number | Verified number |
EBITDA | $331,600 | $206,100 |
Multiple | 4.2x | 4.2x |
Implied price | $1,392,720 | $865,620 |
Seller numbers drift for ordinary reasons. The books were built for the tax return, not for a buyer. The owner paid personal costs through the business, ran the operation without a salary, and booked refunds and true-ups in whatever year they landed. A broker paid at closing, then picks the most favorable reading of each item. None of that requires bad faith, and it all raises the number.
Earnings come first. The multiple only scales whatever earnings you hand it.
The Financial Analysis: From $331,600 to $206,100
The reconciliation starts with the seller's reported EBITDA and walks it to a buyer-basis figure, one line at a time, each tied to a document. Here is the full walk for the Davenport operation, which reports $1,483,000 in gross revenue and $1,320,000 in settled revenue.
Reconciliation line | Amount | Support |
Seller-reported EBITDA | $331,600 | Broker package, trailing twelve months |
Owner/manager replacement wage | ($62,000) | Seller drew no wage for a full-time manager role |
One-time add-backs not supported | ($19,300) | Broker added back $28,500; ledger supports $9,200 |
Insurance premium true-up | ($11,200) | Audit credit booked in the year; renewal premium is higher |
Family driver wages below market | ($16,800) | Two relatives paid under market, replaced at market rate |
One-time FedEx settlement item | ($14,400) | Prior-period true-up inside settled revenue |
Deferred repairs and maintenance | ($9,700) | Repairs ran below the three-year average |
Verified personal expenses | $7,900 | Owner vehicle and phone, supported by statements |
Verified EBITDA | $206,100 | Sum of the lines above |
Three lines carry most of the weight. The manager wage is the largest because the seller worked the business full time and booked no pay for it, so a buyer must either do that job or hire for it. The unsupported add-backs came from a $28,500 list the broker labeled one-time, where the ledger showed legal and accident costs in prior years. The family drivers were real savings for the seller and will not carry over to a buyer who pays market wages.
Six of the seven adjustments cut earnings, and one adds back $7,900 supported by the paperwork. Net, the seller's figure drops by $125,500, or 37.8%. Verified EBITDA is 15.8% of the $1,305,600 in settled revenue remaining after the one-time item. That is close to the roughly 15% average margin route brokers cite for pickup-and-delivery routes. The seller's figure was 25.1%, near the top of the range.
Now put the loan on both. At 90% financing, the loan is $1,255,500 at 9.75% over ten years, with annual debt service of $197,018. We use 9.75% (prime of 7.00% plus 2.75 points) as the illustrative rate.
Metric | Broker presentation | Verified |
Gross Revenue | $1,483,000 | $1,483,000 |
Settled Revenue | $1,320,000 | $1,305,600 |
Adjusted EBITDA | $331,600 | $206,100 |
EBITDA Margin | 25.1% | 15.8% |
Purchase price | $1,395,000 | $1,395,000 |
Price to EBITDA | 4.2x | 6.8x |
Annual Debt Service | $197,018 | $197,018 |
DSCR | 1.68x | 1.05x |
The verified DSCR of 1.05x is below the 1.25x a lender requires. EBITDA is not the same as free cash flow. After $197,018 in debt service, $9,082 remains before fleet replacement, taxes, and any owner draw.
What price works? A loan of about $1,050,700 would reach 1.25x, which implies a price near $1,167,000. That clears the lender and still pays 5.7x verified earnings. At 4.0x, a multiple inside the 3x to 4.5x band route brokers commonly cite, the price is $824,400. The loan is $741,960 at 9.75% over ten years; debt service is $116,432, and DSCR is 1.77x.
Case Study: The Columbus Lender Memo
A Columbus buyer, another composite, signed an LOI at $1,100,000 for a five-truck business with $1,042,000 of settled revenue. The package showed $262,300 of EBITDA. On a $990,000 loan with $155,355 of annual debt service, DSCR was 1.69x. He treated the LOI as the end of the analysis.
His SBA lender rebuilt the earnings during underwriting and sent back a different memo. The replacement manager's wage was $54,000. A $16,500 legal expense the broker called one-time appeared in all three years of the ledger, from accident claims. Insurance was $12,300 light, and deferred maintenance accounted for another $9,100. Verified EBITDA was $170,400 (16.4% margin), and DSCR on the same loan fell to 1.10x.
That was under the 1.25x the lender needed. It cost him three weeks and a deposit he couldn't move, and it put the seller in a position to blame him for the delay.
He renegotiated with the verified numbers in hand. The price rose to $699,000, or 4.1x verified EBITDA. The loan became $629,100, debt service dropped to $98,721, and DSCR rose to 1.73x. The seller accepted because the lender's memo and the ledger said the same thing.
The lesson is sequence. The same reconciliation at the pre-LOI stage would have set the price before the deposit, not after.
What the Reconciliation Exposes Operationally
Each line in the walk points to something that changes how the business runs after closing. Four show up repeatedly.
Labor that disappears at closing. If the seller worked 55 hours a week as the manager and paid himself nothing, the buyer either does that job or hires someone. Either way, the cost is real. We price it as a wage, not a hope.
Insurance that resets. Premium credits and audit refunds flatter one year. The renewal after a sale is based on the new owner, the fleet, and the loss history, and can be materially higher.
Maintenance that was postponed. A seller heading for the exit often defers repairs. The buyer inherits the bill in the first year, which is also when debt service starts.
Revenue that does not repeat. Settlement true-ups, prior-period adjustments, and one-time incentives appear in settled revenue only once. If they are in the base, the multiple pays for them every year.
Every one of these traces to a document: the payroll register, the insurance audit, the repair ledger, and the settlement statements. If a seller cannot produce them, the adjustment defaults to the seller.
KPI | Davenport example | What to watch |
Net adjustments | ($125,500), 37.8% of seller EBITDA | Our rule of thumb: over 20% means rebuild the whole package |
Verified EBITDA margin | 15.8% | Brokers cite roughly 15% on average for P&D routes |
Price to verified EBITDA | 6.8x | Route brokers commonly cite 3x to 4.5x |
DSCR on verified EBITDA | 1.05x | Lender floor is 1.25x for most changes of ownership |
Cash after debt service | $9,082 | Fleet reserve and taxes still come out of this |
The Lender and CFO View: Coverage, Cash, and Risk
A lender does not underwrite the broker's package. It underwrites tax returns, a general ledger, and its own normalization, then divides by debt service.
DSCR = Net Operating Income ÷ Annual Debt Service
Under SBA's SOP 50 10 8.1, effective October 1, 2026, most change-of-ownership loans must show 1.25x on historical cash flow, up from 1.15x, and projected growth generally cannot cover a shortfall. The same rules call for a 10% minimum equity injection. A buyer who reconciles first knows which side of that line the deal sits on before the lender tells him. We use EBITDA as the numerator throughout; a lender may also subtract taxes and owner draws, which would lower every coverage figure in this post.
The lender normalizes in the same direction we do. It replaces owner pay with a market wage, strips non-recurring revenue, and tests claimed add-backs against the ledger and bank statements. Items it cannot support come out of earnings, which lowers DSCR. The broker's package will not say any of this, and many buyers first see it in the lender's memo.
That changes the negotiation. Walking in with a line-by-line ledger walk lets you ask for a price tied to documents, not opinion. Sellers can dispute a multiple. It is harder to dispute their own general ledger.
It also changes how you read approval. A lender passing a deal at 1.25x says the loan can be serviced on historical earnings. It doesn't say the price is right, the fleet is sound, or the leftover cash is enough. Davenport at $1,167,000 clears the lender and still overpays by about $342,600 against a 4.0x price.
From the CFO chair, the question is cash after debt service. At $824,400, the buyer keeps $89,668 of EBITDA after $116,432 of debt service. Fleet replacement, taxes, and working capital come out of that, so the reconciliation should feed a cash forecast, not just a DSCR line.
Buyer Questions About the EBITDA Reconciliation
Q: What is an EBITDA reconciliation?
A line-by-line bridge from the seller's reported EBITDA to a buyer-basis figure. Each adjustment is tied to a document, so you can defend the final number to a lender and the seller.
Q: What documents do I need?
Three years of tax returns, monthly profit and loss statements, the general ledger, FedEx settlement statements, payroll registers, insurance policies and loss runs, and the vehicle and asset list. If the seller will not share the ledger, treat that as a finding.
Q: Which add-backs do sellers get wrong most often?
Owner compensation, expenses called one-time that repeat every year, and personal costs without supporting documentation. You can usually test each against the ledger in a few hours.
Q: Is this the same as a Quality of Earnings report?
No. The reconciliation is the earnings bridge, done before the LOI. A full QoE goes further into cash proof and working capital. Under SOP 50 10 8.1, a QoE is mandatory at $3,000,000 or more, so a smaller route deal may not require one.
Q: What multiple should I apply to verified EBITDA?
Route brokers commonly cite 3x to 4.5x for most FedEx routes. Where you land inside that band depends on fleet condition, driver stability, and contract terms. Apply it only to the verified figure.
Q: If my lender approves the loan, can I trust the broker's EBITDA?
No. Approval means the lender's own rebuilt numbers cleared its threshold. It says nothing about whether the broker's figures were right or the price is fair.
Conclusion
A multiple multiplies whatever you give it. Give it the seller's earnings, and you pay the seller's price. Rebuild the earnings from the ledger, settlement statements, and payroll first, then negotiate. Buyers who skip that step often learn the real number from a lender memo weeks after the deposit is gone.
Start with three documents before any LOI: the general ledger, the settlement statements, and the payroll register. Each one tests a different part of the broker's number, and together they usually show where the walk begins.
Related reading: How to Read a Broker's Confidential Information Memorandum Like a CPA, Not a Buyer, Why the Broker's Add-Back Schedule Was Never Meant to Be Neutral, and Quality of Earnings for FedEx Contractors: What Are You Really Buying?.
Want the walk done on your deal? Download the EBITDA Reconciliation Checklist and schedule a Due Diligence Review. We rebuild the seller's number from the documents and show you the price it supports.
Comments