Many valuation methods use EBITDA as a basis. However, the profit reported in your financial statements often does not accurately reflect your company’s sustainable earning power. That is why EBITDA is normalized: adjusted for items that are not representative. In this blog, you’ll learn why this is necessary, how it works, and what buyers look for.
What is EBITDA, and why adjust it?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It provides a picture of operating profit, excluding the impact of financing and depreciation. However, even this profit is often “skewed” by the entrepreneur’s personal decisions or one-time events.
A buyer wants to know the company's underlying earnings. That is why EBITDA is adjusted to a normalized version that provides a more accurate basis for multiples and other valuation methods.
Typical corrections during normalization
When normalizing EBITDA, items that are not structural or in line with market conditions are adjusted. Examples include:
- DGA compensation: Business owners often pay themselves too much or too little.
- One-time items: for example, an exceptional insurance claim or a one-time grant.
- Lease and IFRS effects: accounting rules that temporarily affect profit.
- Owner’s benefits: personal expenses charged to the business, such as a car or travel.
These adjustments provide an accurate picture of the profit a buyer can expect in the future as well.
Why is standardization so important?
Without normalization, the basis for valuation becomes skewed. A buyer doesn’t want to pay for one-time windfalls or creative accounting choices. Conversely, it’s also unfair to undervalue your company by paying yourself an excessively high salary.
Normalized EBITDA makes companies more comparable. It is the standard metric used in valuations and negotiations.
How do you present normalized EBITDA?
It’s a good idea to explicitly document the adjustments, for example, in a breakdown that shows, step by step, how you arrived at the adjusted EBITDA from the financial statements. This demonstrates transparency and increases the likelihood that a buyer will accept your assumptions.
Such an overview includes, for example:
- Financial Statements—EBITDA
- Adjustments for one-time or non-market-based items
- The final normalized EBITDA
This process is often carried out during the preparation for the sale, so that there are no surprises during due diligence.
Frequently Asked Questions
What happens if I don't normalize my EBITDA?
Then there’s a good chance that a buyer will do it themselves, and that usually doesn’t work in your favor.
Can you correct anything you want?
No. Only substantiated, non-structural items are eligible. Everything must be transparent and verifiable.
What are the benefits of standardization for me?
A fairer and often higher valuation, because profitability becomes more transparent.
Would you like to know what your normalized EBITDA looks like and what that means for the value of your company? The advisors at Hogenhouck M&A will help you understand this and ensure that you enter the market with a strong and credible foundation.
