Check adjusted earnings by starting with a clearly defined reported measure and tracing every proposed change back to it. Establish that a cost reduced that starting measure, examine why it would change, and include the cost of work that must continue under the buyer.
Keep three results separate: the seller's claimed figure, the changes supported by the supplied evidence and the buyer's operating plan. The same label can conceal very different calculations.
Name the starting measure
Consider an entirely fictional sign-making company for the year ended December 31, 2025. Its supplied accrual accounts report $90,000 of operating earnings before interest and income tax, after all operating expenses and depreciation. Call this the reported operating result throughout the comparison.
The base already includes $60,000 of owner compensation and associated employer costs, $12,000 of fully expensed office-moving costs, $6,000 of recurring essential software subscriptions, $4,000 for settling a customer claim and $18,000 of depreciation. A separate $20,000 owner distribution reduced company cash and equity, not this operating result. These accounting facts are supplied for the illustration, not conclusions about a real seller's records.
The seller's schedule adds six amounts to $90,000: $12,000 for the move, $60,000 for owner compensation, $6,000 for software, $4,000 for the claim, $20,000 for the distribution and another $3,000 for moving cleanup. The claimed total is $195,000.
Give each adjustment a reason
Review of the fictional seller's schedule
Scroll across to see each treatment. Use the arrow keys when the table area is focused.
| Seller adds | Supplied evidence | Treatment in this model |
|---|---|---|
| Move: $12,000 | Invoices tie to the base. The move is complete; no further move is planned. | Remove this identified historical expense in the stated comparison. Future nonrecurrence remains an assumption. |
| Owner compensation: $60,000 | The full amount reduced the base. The owner performed continuing work. | Remove the seller's compensation only alongside a separate complete replacement cost below. |
| Software: $6,000 | Recurring subscriptions needed to deliver current work. No replacement or cancellation saving established. | Keep the expense; reject this proposed add-back on the supplied facts. |
| Customer claim: $4,000 | Expense is in the base, but claim history and cause are not supplied. | Unresolved. Do not add it in the supported case. Request the history and underlying explanation. |
| Owner distribution: $20,000 | Never reduced the operating result. | No add-back to this base. |
| Cleanup: $3,000 | Already included within the $12,000 moving expense. | No second add-back. |
The supported removals total $72,000: the $12,000 move plus $60,000 of seller compensation. Adding them to the reported $90,000 gives a $162,000 subtotal before paying for the owner's continuing work. It is not a transferable, fully staffed earnings figure.
The seller's $195,000 exceeds that subtotal by $33,000: $6,000 software, $4,000 unresolved claim, $20,000 unexpensed distribution and $3,000 counted twice. The schedule can add up perfectly while containing all four problems.
Put the owner's work back once
For this fictional buyer's plan, the defined owner duties can be covered by a replacement arrangement costing $78,000 for a complete comparable year, including compensation, employer charges and benefits. Assume the arrangement is available and covers all those duties without using unpaid buyer labor. This is a supplied model cost, not a salary estimate.
The buyer-specific operating comparison is therefore $162,000 minus $78,000: $84,000. Cross-check from the base: $90,000 plus $12,000, plus $60,000, less $78,000 gives the same answer.
The replacement costs $18,000 more than the seller's expensed compensation. Removing the $12,000 move offsets part of that difference, leaving the result $6,000 below the reported base. Do not subtract the $78,000 a second time: the bridge has already paid for the work.
Leave unresolved items visible
If later evidence supports treating the $4,000 claim as nonrecurring under this comparison, a separate case would reach $88,000. Until then, keep $84,000 and the open question visible. A claim occurring at irregular intervals may still be part of operating the business.
In its non-GAAP reporting interpretations, SEC staff discusses clear labels and the risk of excluding ordinary recurring operating costs. That guidance concerns its regulated reporting context; it is not a universal adjustment rule for every private business sale. The evidence and arithmetic above define this particular example.
Finally, $84,000 is not cash available to spend. The $18,000 depreciation expense remains in the result. A proposed $24,000 equipment purchase next year belongs in a separately dated cash plan, together with collections, working capital, financing payments and tax. Do not count the purchase and depreciation as two payments for the same asset. The earnings-to-cash explainer handles that distinction.
Use the bridge to improve the next question, not to apply a valuation multiple automatically. Future demand, replacement arrangements and purchase terms still need their own evidence.
For another view of what an owner must keep doing after acquiring desirable assets, read the opening of Infinite Upside. The memoir's account of a hobby becoming an operation adds a human question to the spreadsheet.
Read alongside the book
Original commentary and discussion material. Read the full personal accounts in Infinite Upside: Building Wealth With Room to Live, by Vijay Sheth.
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