EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a commonly used financial metric that measures a company’s operating performance. However, in the context of selling a business, EBITDA is often adjusted to reflect the true earnings of the business. Here are some examples of adjustments that may be made to EBITDA:
- Non-recurring expenses: Non-recurring expenses, such as one-time legal fees or restructuring costs, may be added back to EBITDA since they do not reflect the ongoing operating performance of the business.
- Owner’s compensation: In small businesses, the owner’s compensation may be added back to EBITDA since it is often higher than what a new owner would take.
- Excess expenses: Certain expenses, such as excessive travel or entertainment expenses, may be adjusted or removed from EBITDA to reflect the true operating performance of the business.
- Capital expenditures: Capital expenditures, such as new equipment or renovations, may be added back to EBITDA since they are not recurring expenses and do not reflect the ongoing operating performance of the business.
- Non-operating income or expenses: Non-operating income or expenses, such as gains or losses from investments or currency exchange, may be adjusted or removed from EBITDA to reflect the true operating performance of the business.
It’s important to note that EBITDA adjustments can be subjective and vary depending on the specific circumstances of the business. Work with a business broker or consultant who has experience in selling businesses to help you accurately adjust EBITDA and determine the appropriate valuation for your business.