EBITDA Normalisation
EBITDA normalisation adjusts reported earnings before interest, tax, depreciation and amortisation for one-off, out-of-period and non-operating effects. The aim is a sustainably achievable earnings figure to which the valuation multiple is applied in a company sale.
Why anything is adjusted
The price of a mid-market company is as a rule the product of an earnings figure and a multiple. The earnings figure is EBITDA – but not the one in the profit and loss account, an adjusted version of it. The reason is simple: the buyer pays for what the business can earn repeatably in future, not for what happened to come out in one year.
The leverage is considerable. At a multiple of eight, an adjustment of EUR 200,000 moves the price by 1.6 million. Every single item is negotiated accordingly hard.
Typical adjustments
- Owner-manager compensation. An owner running the business often does not pay themselves what an employed managing director would cost. The difference to a market salary is corrected – in both directions.
- Non-operating expense. Privately used vehicles, property, memberships, family members on the payroll.
- One-off effects. Litigation, restructuring cost, relocation, a single large order, gains on asset disposals, state support.
- Related parties. Rent, licences or supply relationships with the seller's other entities on non-arm's-length terms.
- Accounting effects. Changes in capitalisation practice, a change in revenue recognition, release of excessive provisions.
- Stand-alone costs in a carve-out: the costs the separated unit would have to bear on its own.
The burden of proof sits with the seller
No buyer accepts an earnings-increasing adjustment on assertion. Every item needs evidence – contract, invoice, journal entry, salary benchmark – and a comprehensible reason why the effect will not recur. A list without evidence is struck out in financial due diligence, and with it the corresponding part of the price.
Where the line runs
The most common dispute is what is genuinely one-off. Restructuring costs in three consecutive years are not a one-off but a pattern. A company running a different lawsuit every year has litigation cost in its business model. And earnings improvements that are still to come – synergies, planned price increases, effects from a project now under way – belong in the plan, not in the normalisation.
What makes the adjustment robust is a complete bridge: from audited earnings, line by line, to adjusted EBITDA, for every year in the review period, with evidence per item. That bridge is one of the first documents a buyer asks for.