Adjusted EBITDA, explained simply
Two versions usually exist. Management-adjusted EBITDA is the seller’s view, often with generous add-backs. Diligence-adjusted EBITDA is the view after an independent quality of earnings analysis has tested each adjustment against evidence.
The negotiation commonly centers on the difference between the two.
From management-adjusted to diligence-adjusted EBITDA
IllustrativeAlder Creek Manufacturing, last twelve months, $ millions
At 8.0x, the $1.15 million gap between the two views is worth $9.2 million of price.
Worked example
| Alder Creek, $ millions | Amount |
|---|---|
| Reported EBITDA | 5.00 |
| Management add-backs (legal settlement 0.30, owner salary 0.25, trade show 0.20) | 0.75 |
| Management-adjusted EBITDA | 5.75 |
| Less: trade show, rejected as recurring | (0.20) |
| Less: one-off gain on equipment sale | (0.60) |
| Less: unrecorded bonuses | (0.20) |
| Less: below-market rent paid to the owner | (0.15) |
| Diligence-adjusted EBITDA | 4.60 |
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Why it matters in a deal
Adjusted EBITDA is usually the figure on which price is based and lenders size debt. Which adjustments are accepted is often the core of the price negotiation.
Red flags
- Adjustments that only increase EBITDA
- A large gap between management-adjusted and reported EBITDA
- Adjustments supported only by management representation
Frequently asked questions
Is adjusted EBITDA the same as normalized EBITDA?
Often used interchangeably. Normalized usually means cleaning up past results, while adjusted may also include pro forma changes.
Who decides which adjustments are valid?
The buyer, on the evidence. The QoE provides that evidence.