Adjusted EBITDA
EBITDA restated to remove one-off, non-market, and non-recurring items so the number reflects how the business will run under a new owner.
Also called: Normalised EBITDA · Pro forma EBITDA
Adjusted EBITDA is where the price actually gets set. Reported EBITDA reflects how the business was run for tax and family reasons; adjusted EBITDA is an attempt to state what a normal operator would earn from the same assets and customers. Typical adjustments include normalising owner compensation to a market rate, removing one-time legal or settlement costs, restating related-party rent to market, and stripping out revenue or costs from a discontinued line.
Adjustments run in both directions, and a schedule that only ever adds is a schedule a buyer distrusts. If the owner has been underpaying a family member, or deferring maintenance, or has not been paying themselves a market salary, honest normalisation reduces the number. Presenting the downward adjustments yourself is one of the cheapest credibility wins available in a process.
Each adjustment needs three things: the amount, the reason it will not recur, and the document that proves it. A quality of earnings provider will test exactly that, and every adjustment that fails the test comes straight off the price at the agreed multiple — which is why a hundred thousand of unsupported add-backs can cost several hundred thousand of enterprise value.
Where sellers get caught
- Calling something one-time when it has appeared in three of the last five years.
- Normalising rent downward to a related party without a market appraisal to support it.
- Leaving the adjustment schedule until diligence. Buyers price the deal off the number in the LOI and treat later reductions as a re-trade trigger.
Common questions
Who decides which adjustments are allowed?
Negotiation, informed by the quality of earnings report. The seller proposes, the QoE provider tests, and the buyer decides what they will pay a multiple on. There is no authority that certifies an add-back.
How much does a rejected add-back cost?
The add-back amount multiplied by the agreed multiple. At a four times multiple, an eighty-thousand-dollar adjustment that fails is three hundred and twenty thousand of enterprise value.
Related terms
EBITDA
Operating profit before financing, tax, and non-cash charges, used as the earnings base most buyers of lower-middle-market companies price against.
Add-backs
Expenses added back to reported earnings because they are personal, one-time, or would not exist under a new owner.
Quality of earnings
An independent accounting analysis that tests whether reported earnings are real, recurring, and sustainable.
Recasting
Rebuilding reported financial statements to show what the business earns for a new owner, by removing owner-specific and one-off items.
Guides that use this term
Where adjusted ebitda comes up in a real sale, and what it changes.
Last reviewed 2026-08-25. General information for business owners, not legal, tax, or financial advice — terms, thresholds, and tax treatment vary by jurisdiction and by deal.