What should be adjusted in EBITDA?

Start with a reconciled earnings figure

Identify the accounting period and reconcile the proposed EBITDA figure to the financial statements. Mixing annual accounts with a different period of management reporting makes it difficult to tell whether an apparent improvement comes from trading or from the calculation. Keep a clear bridge from the reported result to every proposed change.

Normalisation can increase or reduce earnings. If the business underpays a working owner, benefits from unusually cheap related-party rent, or has postponed an essential operating expense, an adjustment may reduce the sustainable figure. The objective is a supportable earnings base, not the largest possible number.

Test the reason for each adjustment

An owner’s salary is not always a full add-back

Suppose a business pays its owner $80,000 for management work. If a suitably qualified replacement would cost $120,000 including relevant on-costs, the illustrative adjustment is a $40,000 reduction to earnings. Simply adding back the $80,000 would ignore the work that still needs doing.

The answer can differ when the earnings measure assumes one working owner. That is why the report must distinguish adjusted EBITDA from seller’s discretionary earnings and explain the assumed staffing model. Two calculations with different owner assumptions cannot be compared by their labels alone.

Build an adjustment schedule that can be challenged

For each item, record the amount, general ledger reference, underlying document, explanation and whether it applies in other periods. Group related entries so a single event is not counted several times. Reconcile the total back to the starting result and show both accepted and unresolved items.

A recurring annual expense is not one-off merely because the supplier or invoice changes. Likewise, a growth initiative does not automatically justify removing all associated costs while retaining the revenue it generates. The earnings and cost assumptions need to describe the same business.

• Use actual records, not a rounded owner estimate.
• Include downward adjustments alongside add-backs.
• Explain whether each amount is historical or forecast.
• Check that replacement costs are not already included elsewhere.

General educational information. Examples are hypothetical and do not value a real business. The appropriate treatment depends on the purpose, evidence and agreed scope.