Start with a traceable calculation
EBITDA means earnings before interest, taxes, depreciation and amortization. Adjusted, or normalized, EBITDA also considers unusual items and the cost of operating the business on a continuing basis. It is an analytical measure, not a substitute for the financial statements or a forecast of cash available to the owner.
Begin with a reported figure that reconciles to the accounts. List each proposed adjustment separately, with its amount, period, explanation and supporting evidence. A buyer should be able to reproduce the calculation rather than accept a single adjusted number.
Adjustments can reduce earnings too
A genuinely non-recurring expense may support an adjustment upward. But an owner doing essential work for below-market compensation can create an additional future cost. Related-party rent may also need to reflect the terms a buyer will actually pay.
Avoid treating every inconvenient expense as exceptional. Repeated repairs, regular recruitment costs or recurring customer disputes may be part of operating the business. An expense that disappears with the seller may still need a replacement service after closing.
Keep future improvements separate
Planned automation, purchasing savings and hoped-for sales growth belong in a forecast with assumptions. They should not be quietly added to historical earnings as though they have already happened. A strategic buyer may value those opportunities, but will also consider implementation cost, timing and execution risk.
This separation helps both sides distinguish the existing business from the buyer’s improvement plan. It also makes disagreements easier to resolve: the discussion can focus on a specific assumption instead of an unexplained valuation gap.
Move from earnings to cash and price
Even well-supported earnings do not settle the transaction value. Review customer concentration, management depth, equipment spending and the cash tied up in inventory and receivables. Two businesses with similar EBITDA can have different risk and funding requirements.
The amount paid to shareholders also depends on the agreed treatment of cash, debt and working capital. A valuation discussion should identify these assumptions explicitly. A credible adjustment schedule is therefore one input to the decision, not a promise of a particular multiple or sale price.
Source notes
MerchantBanker.ca’s Financial Analysis and Operational Assessment frameworks.
General transaction education. Company-specific decisions require appropriate financial, legal and other professional review.