Definition
Adjusted EBITDA starts with an earnings measure and applies additional adjustments defined by the party presenting it. Adjustments may be proposed for unusual costs, owner-related expenses, or changes in the operating business. There is no universal set of add-backs that makes every company's adjusted figure comparable. The reconciliation is part of the meaning of the number.
An expense being described as exceptional does not establish that it will disappear after a transaction. A proposed replacement cost, continuing operating need, or repeated supposedly one-time charge can change the assessment. Keep the reported starting point, each adjustment, its rationale, and its evidence distinct. Acceptance of an adjustment is a diligence judgement rather than a conclusion an origination label can supply.
In origination work
During early screening, preserve the seller's terminology and identify the period and entity scope. Do not combine an unadjusted figure for one candidate with an adjusted figure for another without making the difference visible. When a reconciliation is unavailable, record that gap. Public research can prepare questions about operating structure, but it cannot validate private expense adjustments or establish the earnings a buyer will actually receive.
What adjustments typically try to capture
Adjustments fall into recognisable families. Owner-related items include compensation above or below a market replacement cost and personal expenses run through the business. Non-recurring items include legal settlements, relocation costs or a one-off project cost. Run-rate adjustments pro forma for a recent price change or a new contract. Pro forma adjustments reflect an acquisition as if it had owned the target for the whole period. Each family has a different evidence requirement.
Owner compensation is the most common adjustment in owner-run businesses and is easy to misjudge. If an owner takes a modest salary but performs the work of two managers, the adjusted figure should reflect the cost of replacing both. Adjusting only in the favourable direction produces a number that flatters the business and is unlikely to survive a buyer's review.
Why the staff guidance is a useful yardstick
For public companies, the SEC staff's published interpretations say that a non-GAAP performance measure can be misleading when it excludes normal, recurring cash operating expenses necessary to operate the business, and that an expense recurring at irregular intervals can still be recurring. The same staff guidance covers consistency across periods and labelling: a measure should not carry a name that implies something different from how it is calculated.
These interpretations do not bind private sellers, but they supply a reasoned set of questions that any buyer or researcher can reuse. Is the adjusted item really not part of running the business? Has a similar item appeared in earlier periods? Is the same adjustment applied to every period shown? A seller whose adjustments pass those questions has a stronger case than one whose adjustments only ever go one way. The auditing standard on audit evidence adds a rule of thumb: evidence from a source independent of the company is generally more reliable than evidence from its own records, so an outside invoice supports an adjustment better than a line in the seller's own schedule.
Handling adjusted figures in a research file
Store the adjusted figure and its components as separate fields: the starting number, each adjustment with its description, and the resulting number. Attribute the whole to its source and date. If another party recomputes the figure, add the second version beside the first rather than replacing it, so the file shows how the view changed and who changed it.
Never rank candidates on a mixture of adjusted and unadjusted figures. If some targets give only reported earnings and others give adjusted ones, either compare on the reported basis or mark each figure's basis visibly and treat the ranking as provisional. A ranking that silently mixes bases will place the more generous presenter ahead for reasons that have nothing to do with the business.
Related terms
- EBITDA — Earnings before interest, taxes, depreciation and amortization, used as a financial measure with important limits.
- Quality of earnings — Financial diligence examining the composition, support, and sustainability of a business's reported earnings.
- Data room — A controlled collection of transaction materials made available to authorised participants for review.
Further reading
- Keep financial criteria comparable
- Lower middle market
- Evidence standards for financial claims
- Screening criteria guide
- Article: estimating private company revenue
- Article: the research handoff checklist
- Provenance
Sources and further reading
- Non-GAAP Financial Measures: Compliance and Disclosure Interpretations, U.S. Securities and Exchange Commission. The staff's reading of when an adjusted measure such as adjusted EBITDA is misleading, and the reconciliation and labelling it expects.
- 17 CFR 229.10 (Regulation S-K, Item 10): General, including non-GAAP measures, Legal Information Institute, Cornell Law School. Paragraph (e) is the rule behind public-company non-GAAP presentation: reconciliation to the nearest GAAP measure and equal prominence.
- AS 1105: Audit Evidence, Public Company Accounting Oversight Board. Sufficiency and appropriateness of evidence, and why evidence from an independent external source ranks above management's assertion.
To apply these distinctions to your own acquisition criteria, discuss your research brief or inspect the demo platform.