Non-recurring items, explained simply
The test is whether the item will occur again under normal operations. A one-time insurance recovery should not be capitalized by the buyer, and a one-time legal settlement should not depress the earnings base.
Diligence examines three years of history to identify “recurring non-recurring” items, such as a restructuring charge that appears every year.
Removing non-recurring items from EBITDA
IllustrativeAlder Creek Manufacturing, last twelve months, $ millions
Net effect of the two items: EBITDA falls by $0.3 million.
Common examples
| Non-recurring income (removed) | Non-recurring costs (added back) |
|---|---|
| Gain on sale of equipment or property | Legal settlements |
| Insurance recoveries | Restructuring or severance |
| Government relief, such as forgiven pandemic-era loans | Costs of the sale process |
| One-off large orders | Fire, flood or other disaster costs |
Worked example
Alder Creek has two non-recurring items in the LTM period: a $0.6 million gain on the sale of old equipment, which is removed, and a $0.3 million legal settlement, which is added back. The net effect is a $0.3 million reduction in EBITDA.
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Accounting note
US GAAP no longer permits “extraordinary items”. Companies disclose unusual or infrequent items separately. Diligence determines what is non-recurring regardless of how the company labeled the item.
Why it matters in a deal
Non-recurring items can make a business look stronger or weaker than it is. Removing them provides a cleaner base for price.
Red flags
- The same type of one-off item appearing year after year
- Only costs treated as non-recurring and never income