Why It Matters
Adjusted EBITDA is the number that drives valuation. When buyers, investors, or lenders apply a multiple to a business, they apply it to Adjusted EBITDA, not to raw EBITDA or net income. Two businesses with identical raw EBITDA can have very different valuations once the adjustments are made.
The gap between raw EBITDA and Adjusted EBITDA can be significant. For an owner-operator who has structured compensation for tax efficiency, run a few one-time expenses through the business, and runs personal items through the books, the gap can change a sale price by hundreds of thousands of dollars.
How to Calculate It
Adjusted EBITDA starts with raw EBITDA and applies three categories of adjustment:
Adjustments work in both directions. Costs that should not have been in the business are added back. Revenues that will not repeat are removed.
As an example, a business with raw EBITDA of $483,000 might have an owner paid $80,000 above market rate, a $50,000 one-time legal expense, $12,000 of personal vehicle costs, and a one-time equipment sale that generated $35,000. Adjusted EBITDA is $483,000 + $80,000 + $50,000 + $12,000 − $35,000 = $590,000.
What Owners Commonly Miss
The most common mistake is failing to make these adjustments before going to market. Owners who present raw EBITDA to a buyer or broker undersell the business. Owners who present Adjusted EBITDA without documentation cannot defend the number under diligence. Both extremes leave value on the table. The work of identifying and documenting the adjustments needs to happen well before any sale process begins.