Adjusted EBITDA

Adjusted EBITDA is a metric for a company's operating profit, excluding one-off or unusual effects. These may include, for example, costs for a legal dispute or a relocation that are not related to the normal business. This creates a view of profitability that can be compared more easily with other companies.

Typical adjustments are restructuring costs, severance, transaction advisory fees, gains on disposals of fixed assets, damages and insurance recoveries, and, in mid-sized companies, normalising owner-manager salaries to a market level and removing privately motivated expenses. Adjusted EBITDA is not a uniformly standardised measure. Its definition, reconciliation and adjustment rationale therefore need to be transparent and consistent across periods. That is exactly where the dispute lies in transactions: each additional accepted add-back raises the valuation base and feeds through at the full multiple, so a one million euro adjustment at a multiple of eight moves the price by eight million euros.

Financial due diligence therefore tests each item individually and classifies it in the quality of earnings analysis as genuinely one-off, non-cash or sustainable. Sellers like to present the figure as pro forma EBITDA and include expected effects of future measures, while buyers focus particularly on implementation and supporting evidence. Adjusted EBITDA should be distinguished from unadjusted EBITDA, which can be derived directly from the income statement, and from free cash flow, which reflects capital expenditure and working capital and therefore sits closer to actual debt capacity.

A reconciliation has proven itself in practice, leading from audited earnings through each individual adjustment to the adjusted figure and showing amount, reason and evidence for every item. That is the only way adjustments can be defended in a process. A distinction should also be drawn between an adjustment correcting a past event and a pro forma adjustment annualising a measure already implemented, such as a price increase effective from October. The second category is considerably more contested in negotiations.