Diligence produces a list of findings — add-backs, red flags, one-off items. An operating model is what turns that list into a single defensible earnings figure a buyer is actually willing to price the deal against.
Key takeaways
One deavo.ai piece comparing the two standard earnings measures explains why the starting measure matters before a single adjustment gets made: SDE “starts from a business's pre-tax profit and adds back interest, one owner's compensation and benefits, and discretionary or non-recurring expenses the current owner ran through the business” while EBITDA “does not add back owner compensation in the same way, on the assumption that the business already pays, or would need to pay, a market wage to whoever runs it.” Blending the two — adding back owner compensation under an EBITDA label, say — produces a number that looks precise and isn't comparable to anything, including the target's own prior-year figures if the method changed partway through.
The same source is explicit that “a multiple applied to SDE is not directly comparable to a multiple applied to EBITDA for the same business, since the earnings base itself is calculated differently” — the model has to declare which measure it's building and hold that choice consistently through every adjustment that follows.
The same piece names the single most common failure point directly: aggressive or unsupported add-backs are “one of the more common points of pushback during due diligence” A model that lists an add-back without the underlying support — an invoice, a termination letter, a lease amendment — is a model that invites exactly that pushback, and loses time in negotiation defending a number that should have been documented the first time.
A companion piece on reading financial statements adds a related caution worth building into the process itself: “two accountants reviewing the same books can reasonably normalize a few borderline items differently” so a model built solo, without a second reviewer checking consistency year over year, is more exposed to exactly this kind of drift than one that gets checked.
The same source's red-flag list translates directly into specific model adjustments: “accounts receivable growing faster than revenue,” “rising inventory levels without a matching increase in sales,” and related-party pricing “including rent paid to a property the owner also owns,” each of these, once confirmed, is a defensible adjustment to working capital assumptions or to the add-back schedule — not just a comment for the closing memo.
One deavo.ai piece on what's inside a typical deal report catalogues what a reasonably complete deal report should already carry: historical and current financials matched to CRA and GST/HST filings, a normalized, add-back earnings summary, an asset list with condition, age and liens, lease and contract details, and the customer-concentration split. But the same source is careful about what this is not: “a deal report is not a valuation and is not a guarantee that the numbers will hold up.” The report is raw material for the model, not a substitute for building one.
If the model is feeding into, or being checked against, a formal valuation, it's worth knowing which standard the valuator is working to. The CBV Institute's own Valuation Practice Standards set out the minimum requirements for a valuator to establish a credible and properly supported conclusion of value effective for engagements beginning on or after January 1, 2026, with a separate family of Expert Report standards covering an opinion on “the quantum of financial gain/loss” specifically. A buyer's own internal model does not have to meet these standards, but understanding what a formal report is actually required to show helps calibrate how much rigour the internal version needs.
A model that only has to convince the person who built it is a different, easier thing to produce than one that has to hold up when the seller's own advisor pushes back on every adjustment. The practical discipline that closes the gap: for every add-back and every normalization, keep the source document, not just the number, in the same file as the model itself — an invoice, a termination letter, a comparable market-rent estimate. A model with that trail attached is defensible in negotiation in a way a model with the same final number and no trail simply isn't, regardless of how carefully the underlying arithmetic was actually done.
A target reports EBITDA of $1.1 million for its most recent fiscal year. Reviewing the detail, the buyer's model identifies two adjustments: a $60,000 gain from selling an old delivery van, flagged as exactly the kind of one-off item the financial-statements guidance above warns about, and $40,000 of rent paid below market rate to a property the owner also owns personally, which the model normalizes upward to a market rate to reflect the real ongoing cost a buyer would actually pay.
Removing the one-off gain and adjusting rent to market brings the model's adjusted EBITDA to $1.08 million — a modest net move, but one supported by two specific, documented line items rather than a single blended “normalization” figure with no visible trail. When the seller's own accountant pushes back on the rent adjustment during negotiation, the model's documentation — a comparable market-rent estimate for the specific property — is what actually resolves the disagreement, rather than restating the same final number more firmly.
It depends on the target and the buyer, not a fixed rule — SDE tends to fit an owner-operator business where a single working owner's full compensation should be added back, while EBITDA tends to fit a business that already runs on a management team paid at a market wage. The two are not directly comparable, so the model should declare which one it's using and stay consistent.
Either, and often both together — a buyer's own team frequently builds a first draft from the deal report and diligence findings, then has an accountant or valuation professional stress-test the add-backs and assumptions before the model is relied on for a final price.
No. A deal report is explicitly described, on the source's own terms, as not a valuation and not a guarantee the numbers will hold up — it's a starting point. A formal quality-of-earnings review goes further, independently testing the add-backs and the underlying accounting rather than simply compiling what the seller provided.
A short call is enough to walk through which adjustments in your specific deal actually need documentation.
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