What Is Adjusted EBITDA? How It Impacts Your Business Valuation

What is the difference between EBITDA and adjusted EBITDA?

When preparing to sell your business, one of the most important concepts you’ll encounter is EBITDA—Earnings Before Interest, Tax, Depreciation, and Amortisation. It is the most commonly used proxy for profitability and is often the starting point for valuing a business. But to get to a realistic, defendable valuation, that EBITDA number typically undergoes a process of “normalisation” or adjustment.

In this article, we explain what EBITDA adjustments are, why they’re used, how they impact your valuation, and what types of adjustments buyers and sellers should expect during a transaction process.

What Is EBITDA and Why Does It Matter?

EBITDA is a measure of a business’s operating performance. By stripping out interest, tax, depreciation, and amortisation, it provides a view of the company’s core earnings potential from trading activities—independent of how it’s financed, taxed, or how its assets are depreciated.

Because it standardises profitability, EBITDA is widely used by buyers as the basis for applying a valuation multiple (e.g., 4x or 6x EBITDA), which ultimately determines enterprise value.

However, the raw EBITDA figure reported in a company’s accounts may not reflect the true underlying, sustainable earnings of the business. That’s where EBITDA adjustments come in.

What Are EBITDA Adjustments?

EBITDA adjustments—sometimes referred to as “normalisations”—are changes made to reported EBITDA to remove one-off, exceptional, or discretionary items that distort the company’s true operating performance.

The goal is to present a more accurate picture of the recurring, maintainable earnings that a buyer can expect going forward. These adjustments are made to ensure a fair valuation and to avoid undervaluing or overvaluing the business based on temporary or non-recurring financial impacts.

Why Are EBITDA Adjustments Important?

Buyers value businesses based on sustainable earnings, not short-term gains or anomalies. Without adjustments, a seller might be penalised for an isolated dip in earnings, or a buyer could overpay based on inflated or misrepresented profitability.

From a seller’s perspective, EBITDA adjustments are an opportunity to showcase the true value of the business by stripping out non-recurring costs or income that won’t affect the business going forward. From a buyer’s perspective, adjustments provide reassurance that the EBITDA used for valuation reflects reality—not accounting quirks or unusual events.

Because EBITDA is multiplied by a valuation multiple, even small adjustments can have a significant impact on price. For example, a £100,000 adjustment in EBITDA with a 6x multiple adds £600,000 to the valuation.

Most Common EBITDA Adjustments

Here are the most typical categories of adjustments seen in UK business sales:

1. Owner Salaries and Benefits

• Excess salaries, bonuses, or benefits paid to owners or family members that exceed market rates. For example, if an owner draws a salary of £200,000 when the commercial market rate for the role is £120,000, the £80,000 difference would be added back.
• Personal expenses run through the business (e.g., car leases, travel, entertainment, or private healthcare), particularly where the expense is not necessary for the functioning of the business.
• Adjustments replace these costs with what a third-party buyer would expect to pay to employ someone in the role, offering a more commercially realistic profit profile.

2. Non-Recurring Income or Costs

• One-off consultancy, legal, tax, or compliance fees—for example, associated with a historical legal dispute, strategic review, or transaction.
• Settlements, refunds, or fines arising from non-operational incidents that are not expected to occur again.
• Exceptional income such as government COVID-19 support grants or a one-time profit on the sale of an asset. These are not part of the ongoing performance of the business and should be excluded to reflect maintainable earnings.

3. One-Time Investments

• Capital outlays for branding overhauls, IT infrastructure upgrades, office relocations, or recruitment campaigns that are unlikely to be repeated.
• Start-up costs for launching new divisions, branches, or business units that have since stabilised and are now contributing to revenue.
• These adjustments distinguish between investment phases and operating profitability, helping buyers understand the sustainable earnings base going forward.

4. Accounting Reclassifications

• Reallocation of expenses that were miscategorised—such as operating expenses that should have been capitalised, or vice versa—which can distort the true EBITDA figure.
• Removing depreciation or amortisation, which are non-cash items and may vary significantly between businesses depending on accounting policy and capital intensity.
• These adjustments are often technical and require clear explanation, but are essential for aligning reported EBITDA with a cash-based view of profitability.

5. Rent and Property Adjustments

• If the business occupies a property it owns, but has not charged itself rent, an adjustment is made to reflect a fair market rental cost that a buyer would expect to incur.
• Conversely, if the business pays rent to a related party (such as a director’s property company) that is significantly above or below market value, an adjustment is made to reflect a fair market equivalent.
• These adjustments ensure EBITDA reflects the real costs of operating the business under a typical arms-length scenario, making comparisons and forecasting more accurate for the buyer.

6. Staff Vacancies or Absences

• Periods where key roles—such as finance, sales, or operations—were unfilled due to resignation, recruitment delays, or long-term leave (e.g., maternity or sick leave) can artificially inflate profitability by lowering wage costs.
• Sellers might normalise costs to reflect full staffing by adding back the estimated salary and associated on-costs for vacant roles. This ensures the EBITDA reflects the cost base a buyer would realistically inherit when running the business at full strength.
• This adjustment is particularly important in knowledge-based businesses or those with lean teams, where even a single vacancy can materially affect reported profitability.

7. Group or Shared Services

• If the business benefits from services provided by a parent company or a related group entity—such as central finance, IT infrastructure, HR, legal, or marketing—these costs may not be separately accounted for in the standalone business’s P&L.
• Adjustments should be made to reflect the commercial cost of obtaining these services externally post-sale. For example, allocating a portion of group overheads or applying market rates for outsourced services.
• These adjustments provide a buyer with a more accurate understanding of what it will cost to operate the business independently after separation.

8. Unrealised Foreign Exchange Gains or Losses

• FX gains or losses on revaluing foreign currency balances (e.g., cash, receivables, payables) may appear on the P&L due to exchange rate movements, but they don’t reflect actual trading performance.
• Because they are non-cash and typically outside management’s control, these are usually excluded from adjusted EBITDA to avoid skewing operational results.
• However, if FX exposure is significant and recurring, buyers may want to understand and factor in the underlying risk elsewhere in the deal—such as in working capital or pricing discussions.

Who Prepares the EBITDA Adjustments?

Sellers, typically supported by their advisers (like Dexterity Partners), are responsible for preparing a detailed EBITDA reconciliation or “EBITDA bridge”. This is a critical component of the financial information pack that is shared with potential buyers and their advisers during a sale process. The purpose of the bridge is to clearly walk the buyer from the reported EBITDA figure—often based on statutory accounts—to an adjusted EBITDA figure that reflects the true maintainable earnings of the business.

The bridge typically includes:

• The reported EBITDA figure from the financial statements
• A schedule of each proposed adjustment, with a line-by-line breakdown
• Clear explanations and justifications for each adjustment
• Source data and supporting evidence (such as payroll records, invoices, contracts, or management accounts)
• A final adjusted EBITDA figure, which forms the basis for the valuation and price negotiations

Buyers and their financial and legal teams will scrutinise each adjustment during the due diligence phase. They will test the validity of each item, assess the assumptions used, and may challenge or attempt to renegotiate them. The more clearly documented, consistent with past trends, and commercially reasonable the adjustments are, the more likely they are to be accepted.

A well-prepared EBITDA bridge signals credibility and transparency. It can also significantly improve negotiation outcomes, reduce delays in diligence, and enhance buyer confidence. At Dexterity Partners, we view this as a foundational step in achieving a premium valuation and a smooth transaction process.

Best Practices for Sellers

To ensure EBITDA adjustments are accepted and understood:

• Start early: Begin compiling and reviewing adjustments several months before launching the sale process. This allows time to gather supporting evidence, consult with advisers, and stress-test assumptions across different performance periods.
• Be consistent: Apply adjustment logic consistently across all years presented to buyers (e.g., 2-3 year trading history). This builds credibility and helps demonstrate that adjustments are not selectively applied to inflate recent profitability.
• Document clearly: For each adjustment, provide a clear narrative explanation, the underlying rationale, relevant calculations, and source documentation (e.g., invoices, payroll records, lease agreements). A well-presented schedule builds trust and reduces the likelihood of challenge.
• Be realistic: Avoid overly optimistic or borderline adjustments—such as projecting future performance into current earnings or removing costs that a buyer will still incur. Reasonableness is key to maintaining credibility and sustaining buyer engagement through diligence.

How Dexterity Partners Helps

At Dexterity Partners, we guide clients through the full valuation process, with a particular focus on identifying, validating, and presenting EBITDA adjustments that maximise credibility and value. Our approach is collaborative, data-driven, and tailored to the unique characteristics of your business and sector.

We:

• Work closely with your accountants and finance team to identify credible and justifiable adjustments, grounded in both financial data and commercial rationale.
• Build a professional, easy-to-understand EBITDA bridge that clearly explains each adjustment with evidence and context. This includes drafting narratives, compiling supporting documentation, and aligning the presentation with industry expectations.
• Defend and articulate the adjustments during buyer discussions and due diligence, helping to prevent erosion of value and ensuring the buyer understands the business on a like-for-like, sustainable earnings basis.
• Ensure all adjustments tie directly into the broader deal story—whether that’s growth potential, exit planning, or strategic investment—so that the adjusted EBITDA figure reinforces the commercial narrative and supports your valuation objectives.

Ultimately, we ensure that adjusted EBITDA is not just a technical exercise, but a strategic tool used to tell the right story to the right buyers.

Final Thoughts on Adjusted EBITDA

EBITDA adjustments are one of the most powerful tools in the business sale process. When prepared and presented correctly, they can materially increase value, improve buyer confidence, and create a shared understanding of the business’s true performance.

If you’re thinking about selling, speak to Dexterity Partners. We’ll help you identify and present your adjusted EBITDA in a way that stands up to scrutiny—and adds real value at the negotiating table.

Adjusted EBITDA – FAQ’s

What is adjusted EBITDA?
Adjusted EBITDA is the reported EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation) modified to remove one-off, exceptional, or discretionary items. It reflects a business’s true, sustainable operating performance.

Why is adjusted EBITDA important in business valuation?
Because EBITDA is used as the base for valuation multiples, adjustments ensure the number reflects maintainable earnings. This helps both buyers and sellers reach a fair, defensible valuation.

What are typical EBITDA adjustments?
Common adjustments include owner salaries and benefits, non-recurring costs, one-time investments, misclassified expenses, rent adjustments, staff vacancies, group service charges, and unrealised FX gains or losses.

Who prepares the EBITDA adjustments?
The seller and their advisers (such as Dexterity Partners) prepare the adjusted EBITDA schedule, often presented in an “EBITDA bridge” with justifications, calculations, and supporting documents.

How do EBITDA adjustments affect sale price?
Because enterprise value is calculated by multiplying EBITDA by a valuation multiple (e.g., 6x), even small adjustments can significantly increase the sale price. A £100k adjustment could add £600k in value.

Can buyers challenge EBITDA adjustments?
Yes. Buyers and their advisers scrutinise each adjustment during due diligence. Well-documented, reasonable, and clearly explained adjustments are more likely to be accepted.

When should I start preparing EBITDA adjustments?
Start early—ideally months before launching the sale process. This allows time to collect evidence, apply consistent logic, and ensure credibility across financial years.