EBITDA adjustments

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What adjusted EBITDA measures

EBITDA is earnings before interest, income tax, depreciation and amortisation. Adjusted EBITDA starts with that measure and changes it for specified items. The result is useful only when the reader can see what changed and why. Different buyers or advisers may accept different adjustments, so the label alone is not enough.

In a valuation, the aim is often to understand the earnings the business can sustain under the stated assumptions. That is why adjustments are also discussed as normalised earnings. They are not a replacement for the accounts, and they do not turn profit into cash flow. Our EBITDA and profit comparison explains the starting measures.

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Normalised earnings: test every adjustment

Ask four questions about each item: Is it included in the reported result? Is it unusual or unrelated to the continuing business? Will the cost or income recur? What evidence supports the treatment? A cost described as one-off may recur in a business that frequently restructures or acquires companies.

Owner remuneration needs a market-replacement view. If an owner works full time but takes little salary, an incoming operator may need to pay someone to do that work. If pay is above a supportable replacement amount, only the difference may be relevant. The same two-way thinking applies to related-party rent and other arrangements.

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EBITDA adjustments: a worked example

This hypothetical example uses annual NZD amounts and assumes the reported EBITDA already excludes interest, income tax and depreciation and amortisation. It illustrates the mechanics, not a client result or an accepted valuation.

The adjusted number is lower than the reported number. A fair bridge does not assume that every adjustment increases value.

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Build an evidence schedule

For each proposed adjustment, record the period, general-ledger account, amount, explanation, document reference and whether it is recurring. Keep actual expenses separate from forecast improvements. A planned saving after purchase is not the same as a historical cost that will not recur.

• Reconcile the unadjusted starting figure to signed accounts or management results.
• Attach invoices, contracts, payroll records or other relevant support.
• Show the calculation for a partial adjustment, such as only the excess portion of rent.
• Record the continuing cost that replaces an expense being removed.
• Track accepted, disputed and unresolved adjustments separately.

A quality of earnings review looks at the durability and evidence behind the result, including issues an add-back schedule alone will miss.

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Avoid double counting and mismatched multiples

If depreciation has already been removed to calculate EBITDA, adding it back again overstates the result. Likewise, the same owner's expense must not appear in two adjustment rows. Check how any benchmark or valuation multiple defines earnings before applying it to your figure.

Seller's discretionary earnings treats one working owner's remuneration differently from an EBITDA measure that includes replacement management. Mixing the two can materially distort a comparison. A business with high maintenance capital expenditure can also have healthy EBITDA while needing substantial cash reinvestment.

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Use the bridge in a transaction discussion

Show the reported result, each adjustment and the final figure together. Explain unresolved items and test the effect of accepting or rejecting them. If earnings are seasonal or have changed sharply, compare periods consistently and investigate the cause.

We help owners connect earnings evidence with independent business valuation and transaction preparation. A clear schedule supports a better discussion about performance; it does not guarantee that a buyer will accept the proposed figure or price.