Adjusted EBITDA

An estimate of sustainable operating earnings after explicitly justified adjustments to reported EBITDA.

Adjusted EBITDA asks what operating earnings are likely to continue under the proposed ownership arrangements. Adjustments can remove genuinely unusual items, but can also add costs the previous owner did not recognize in a comparable way. A seller drawing dividends instead of a market salary does not eliminate the economic cost of replacing that person’s work.

One source challenges a claimed £1m earnings figure assembled from £0.5m actual earnings plus a £0.5m marketing addback. The crucial question is whether sales survive without the spending. Another discussion normalizes an Irish target’s earnings downward to allow for operator compensation. These examples show that normalization can lower earnings as well as raise them. Watch source Watch source

Build an adjustment schedule with the original account, amount, explanation and evidence for each change. Separate completed cost savings from intended improvements, and avoid counting a saving twice. Ask whether the adjustment would hold in a weaker trading year. In another reported target, historical pretax profits were higher than the normalized EBITDA used for underwriting. That is a reminder to retain the original metric labels and explain the bridge. An agreed adjustment is still an estimate; it does not independently establish the durability of the resulting profit. Watch source

Follow the connections

EBITDA · Due diligence · Valuation multiples.

Continue in the course: Earnings versus cash.

See it in an example

Reported completed

The reported £1.8m acquisition

Reconcile the reported payment schedule and see how rounded earnings change the purchase multiple.

Hypothetical

When an addback doubles claimed earnings

Test the operating assumption behind a marketing adjustment before using it to value a business.

Hypothetical

A £3.5m valuation from two years of earnings

Average the stated pretax profits and compare how the chosen year changes the apparent multiple.

Numbers in context

HVAC target financial normalization · £7m revenue; FY March 2023 £1.9m PBT; FY March 2024 £1.7m PBT; normalized £1m EBITDAMixed

Historic pretax earnings are adjusted downward when discussing a sustainable HVAC earnings base.

Later statements include both results and forecasts; PBT and EBITDA are different measures and the company name is uncertain. Includes audio recovered with Whisper; amounts and wording have not been independently verified.

Addback challenge example · £0.5m actual + £0.5m removed marketing=£1m claimedHypothetical

A buyer challenges an earnings adjustment that removes marketing expenditure.

Removing a cost on paper does not show the business can operate without it.

Historical adjusted earnings · Reported just over £1m EBITDA; adjusted sustainable ~£950k; rounded to £1mPersonal experience

Reported EBITDA is reduced to an estimate of sustainable earnings before discussing price.

Rounded £1m and adjusted £950k produce different multiples.

Historical multiple · 1.8x using rounded £1m; ~1.895x using £950k adjusted EBITDA (calculated)Personal experience

The same purchase price is compared with rounded and adjusted EBITDA.

About 1.895x is an arithmetic calculation from £950k, while 1.8x uses rounded £1m earnings.

Cash residue · £1m–£500k–£250k–£100k=£150kHypothetical

Bank principal, bank interest and seller payments are subtracted from the example's earnings.

The £150k remainder omits taxes, capital expenditure, working capital and hiring, so it is not proven distributable cash. Includes audio recovered with Whisper; amounts and wording have not been independently verified.

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