Worked example
Separate a supported expense adjustment from a recurring cost
A fictional earnings review tests what evidence supports removing a one-time expense.
HypotheticalFictional Acquisition Companion example
This hypothetical uses invented facts and numbers. A fictional distributor reports £420,000 of EBITDA. During diligence, the seller requests an adjustment for £120,000 of marketing costs. The buyer’s sample records support £36,000 as a one-time launch campaign; the remaining £84,000 relates to activity expected to continue.
Reconcile the proposed adjustment
- Reported EBITDA: £420,000.
- Portion supported as a one-time cost in this case: £36,000.
- Ongoing marketing expense retained: £120,000 − £36,000 = £84,000.
- Candidate adjusted EBITDA: £420,000 + £36,000 = £456,000.
The arithmetic does not establish that £36,000 qualifies. The buyer still needs source documents, confirmation that the expense is included in reported earnings, and evidence that removing it will not require replacement spending.
Keep the operating need in the forecast
An expense can be unusual and still be necessary to maintain customers or replace a one-off activity. Test the commercial purpose, timing and effect of removal, then model any replacement cost. Apply a valuation method only after the earnings base is supported. Continue with adjusted EBITDA and due diligence.
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