Glossary
Adjusted EBITDA
Adjusted EBITDA is EBITDA modified to remove non-recurring, non-operating or owner-specific items and, in some cases, to reflect pro forma changes such as cost savings. It aims to show the sustainable earnings a buyer or lender can expect going forward and is the figure most M&A prices and loan sizes are based on.
Formula
Example
A company reports EBITDA of $3,000,000. Diligence supports adding back a $250,000 one-time lawsuit settlement and $150,000 of the owner's salary above what a replacement CEO would cost, and deducting $100,000 because a below-market related-party lease will reset to market at closing. Adjusted EBITDA = $3,000,000 + $250,000 + $150,000 - $100,000 = $3,300,000. At a 6.0x multiple, that adds $1,800,000 of value versus reported EBITDA.
How it is used in underwriting
Because purchase prices and loan amounts are multiples of adjusted EBITDA, every add-back has a magnified effect on value and leverage. Sellers and bankers prepare an adjusted EBITDA bridge from reported results, and buyers test each item through a quality of earnings review. Underwriters classify adjustments into categories: clearly non-recurring items, owner or related-party normalizations, accounting corrections and forward-looking pro forma adjustments. The first three are usually accepted with documentation. Pro forma items, such as synergies or cost savings not yet realized, deserve the most skepticism, and lenders often cap them as a percentage of EBITDA in credit agreements.
Adjustments should work in both directions. Good underwriting adds back true one-time costs but also deducts one-time gains, below-market rent paid to an owner, unfilled positions that must be hired, and deferred maintenance that will need to be spent. Recurring restructuring charges that appear every year are not non-recurring. Lender and equity perspectives differ: equity buyers may pay for some pro forma upside, while lenders size debt on what the business has demonstrated. A large gap between reported and adjusted EBITDA, especially driven by projections, is a signal to dig further before relying on the number.
Frequently asked questions
What are common EBITDA add-backs?
Common add-backs include one-time legal or settlement costs, transaction expenses, owner compensation above market rates, personal expenses run through the business, non-recurring consulting projects and losses from discontinued operations. Buyers also make negative adjustments, for example for below-market related-party rent or one-time revenue that will not repeat.
Is adjusted EBITDA a GAAP measure?
No. Adjusted EBITDA is a non-GAAP measure, and there is no standard definition. Each company, seller or credit agreement defines its own adjustments. That flexibility is useful for showing normalized earnings but also allows aggressive presentation, which is why buyers and lenders reconcile it carefully to audited or reviewed financial statements.
How do lenders treat adjusted EBITDA?
Lenders typically accept well documented non-recurring and normalization adjustments but are cautious with pro forma items such as projected cost savings. Many credit agreements cap these add-backs or require them to be realized within a set period. Lenders also run downside cases on adjusted EBITDA to confirm the loan remains serviceable.
Related terms
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