Resource
Adjusted EBITDA
The number a mid-market business is actually priced on — how the bridge from reported to maintainable earnings is built, and the tests that decide whether every add-back survives.
Written by CA Pranay Bhansali, Founder & Principal, Volaxi — Chartered Accountant (ICAI), former senior buy-side research analyst.
Last reviewed October 2026 · LinkedIn
The guide in summary
| Topic | What it covers |
|---|---|
| Definition | Adjusted EBITDA is maintainable earnings — the figure the valuation multiple is applied to. |
| Adjustments | Owner compensation, one-offs, related-party terms and run-rate changes, each evidenced. |
| Bridge | Every line carries an amount, a direction and a document; upward add-backs carry the burden of proof. |
| Example | A worked bridge from reported 1,000 to adjusted 1,000, with each adjustment itemised. |
| Testing | Evidence, recurrence, symmetry, run-rate proof, benchmarking and consistency decide what survives. |
| Sellers | A prepared, evidenced bridge protects price and shortens diligence. |
01
What adjusted EBITDA measures
EBITDA — earnings before interest, tax, depreciation and amortisation — is a proxy for the cash-generating capacity of the operating business. Adjusted EBITDA goes one step further: it removes items that are non-recurring, non-operational or distorted by the current ownership, so the figure represents the earnings a buyer can reasonably expect to maintain.
That number matters because most mid-market businesses are priced as a multiple of it. Every adjustment that survives review moves the price by the multiple itself — a contested add-back of 100 on a 6x deal is 600 of enterprise value. Adjusted EBITDA is therefore not an accounting exercise; it is the single most negotiated number in a transaction.
Reported EBITDA
Profit before interest, tax, depreciation and amortisation, as the accounts present it.
Adjusted EBITDA
Reported EBITDA after normalisation — the maintainable earnings figure the multiple is applied to.
Maintainable earnings
The level of earnings the business can sustain under new ownership, without the current owner's one-offs and distortions.
02
Common normalisation adjustments
Every adjustment must meet two tests: it must be genuinely non-recurring or non-operational, and it must be evidenced. An adjustment that is merely plausible but undocumented will not survive a buyer's quality of earnings review. The categories below cover most of what appears in practice.
Owner compensation
Salary and benefits paid to the owner above or below a market rate for the role, restated to the cost of a professional replacement.
One-off income and expenses
Legal settlements, restructuring costs, insurance recoveries, relocation costs and other items that will not repeat.
Related-party transactions
Rent, services or trading with entities the owner controls, restated to arm's-length terms.
Non-operating income
Rental income from surplus property, gains on asset disposals and interest income that is not part of operations.
Discretionary spending
Personal expenses run through the business — vehicles, travel, subscriptions — that a new owner would not incur.
Under- or over-market costs
Below-market rent from a related landlord, or temporary cost savings that will reverse, adjusted to a sustainable level.
Lost or gained contracts
The run-rate effect of customers won or lost during the period, where the accounts do not yet reflect a full year.
Accounting policy effects
Capitalisation choices, provisioning changes and revenue recognition that distort period-to-period comparability.
03
The bridge from reported to adjusted
The adjusted EBITDA bridge walks from the audited or management-reported figure to the normalised figure, line by line. Each line carries the amount, the evidence and the period it relates to. A bridge that cannot be tied back to the trial balance and the underlying documents is a claim, not an analysis.
Buyers read the bridge in two directions. Downward adjustments — removing one-off gains, restating related-party benefits — are usually accepted quickly. Upward adjustments — add-backs that increase earnings — carry the full burden of proof, because each one multiplies directly into the price.
Reported EBITDA
The starting point, reconciled to the statutory accounts or the trial balance.
Plus: non-recurring expenses
One-off costs added back, each supported by invoices, settlement agreements or board papers.
Less: non-recurring income
One-off gains removed, so the figure is not flattered by items that will not repeat.
Plus or less: owner and related-party normalisation
Compensation, rent and trading restated to market terms, in whichever direction the evidence points.
Plus or less: run-rate adjustments
The annualised effect of contracts, price changes and cost programmes, applied only where the change is contracted and evidenced.
Equals: adjusted EBITDA
The maintainable figure to which the valuation multiple is applied.
04
A worked calculation
An illustrative bridge for a business reporting EBITDA of 1,000. The figures are hypothetical; the structure is what matters — every line has an amount, a direction and an evidence requirement.
Reported EBITDA
1,000 — per the management accounts, reconciled to the trial balance.
Add: one-off legal settlement
+80 — a settled dispute that will not recur, evidenced by the settlement agreement.
Add: owner salary above market
+60 — the owner draws 140; a professional manager costs 80.
Less: one-off insurance recovery
−50 — a claim receipt that will not repeat.
Less: lost customer run-rate
−90 — a customer lost in month four; the accounts carry eight months of their revenue.
Adjusted EBITDA
1,000 + 80 + 60 − 50 − 90 = 1,000 — the same number, but now evidenced and defensible.
05
How buyers test every add-back
A quality of earnings review does not accept the bridge; it rebuilds it. The tests below are the ones that decide whether an adjustment survives — and therefore whether the price holds.
Evidence
Is each adjustment supported by a document — an invoice, contract, settlement or payroll record — rather than a management assertion?
Recurrence
Has the 'one-off' item appeared in prior years under a different label? Recurring one-offs are operating costs.
Symmetry
Are one-off losses added back while one-off gains are quietly left in? The bridge must run in both directions.
Run-rate proof
Is a run-rate adjustment backed by a signed contract and actual post-period trading, or by a forecast?
Market benchmarking
Is the replacement cost for owner compensation and related-party terms supported by observable market rates?
Consistency
Are the same normalisation principles applied to every period presented, including the forecast?
06
What this means for sellers
Sellers who prepare their own adjusted EBITDA bridge before a process — with evidence assembled for every line — control the conversation. Sellers who leave it to the buyer's adviser watch the number move against them, one unsupported add-back at a time.
The work is not cosmetic. A defensible bridge shortens diligence, reduces the scope for price chips late in the process, and signals that the rest of the financial information will survive the same scrutiny.
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