Price in a negotiation is almost always expressed as a multiple of EBITDA. The trap is that buyer and seller rarely compute the same EBITDA. In the mid-market the gap between the two figures routinely runs to fifteen or thirty per cent, and it is then multiplied, which turns it into a difference in price several times larger.
Why earnings are normalised at all
EBITDA is earnings before interest, tax, depreciation and amortisation. In an owner-managed company, reported EBITDA reflects the owner’s decisions about how they take money out of the business and which costs they keep inside it, rather than the economics of the activity itself. The buyer is not acquiring those decisions. They are acquiring the business as it will run once they own it, with management paid at market rates and personal costs removed. Normalisation is the process of getting from the reported figure to that one.
Adjustments a buyer usually accepts
- Owner’s salary restated to what a hired director doing the same job would cost. If the owner takes EUR 20,000 a year and the role costs EUR 60,000, EBITDA is adjusted down by 40,000. It works the other way too, where the owner draws well above the market rate.
- Rent paid to a related party restated to market, supported by a valuer’s opinion or comparable listings in the same area.
- One-off costs that will not recur: a concluded lawsuit, a plant relocation, redundancy payments from a single restructuring, the cost of a project that was abandoned.
- Costs that are not business costs: a car used by a family member, private travel, memberships, assets not used in the operation.
- One-off income in the other direction: an insurance recovery, the sale of a fixed asset, a grant that will not repeat. These adjustments reduce EBITDA and sellers routinely forget them.
Adjustments a buyer strikes out
The most commonly rejected adjustment reads "this cost will not exist after the sale". Savings that arise because the buyer has its own procurement, accounting or logistics are real, but the buyer creates them, so the buyer does not pay for them in advance.
The second group is costs that have been cut and will have to come back. Maintenance deferred for two years, marketing at a third of its usual level, vacancies left unfilled. In the accounts this looks like higher profit, but the buyer restores the line to a sustainable level and reads it as a signal that investment will be needed immediately after completion.
The third is claimed lost revenue without evidence. "Without the downturn we would have sold another million" is not an adjustment. If there is a signed contract that was terminated or an order that was cancelled, there is a conversation to be had. Without that, there is not.
An adjustment you cannot document does not exist
In diligence every adjustment is defended with a document rather than an explanation. The owner’s salary needs a market pay survey or a comparable director’s contract. Rent needs a valuation. A lawsuit needs the judgment and the legal invoices. Personal costs need bank statements with the entries marked. Assembling that material takes weeks and is done before the buyer enters the data room, because an adjustment first raised mid-diligence loses credibility whether or not it is correct.
What it is worth in money
A company reports EBITDA of EUR 400,000. The owner takes a salary EUR 40,000 below market, rent on a warehouse owned by the family is EUR 30,000 above market, last year carried a one-off legal cost of EUR 60,000, and two cars not used in the business run at EUR 20,000 a year. The net adjustment is EUR 110,000 upward, so normalised EBITDA is EUR 510,000. At a multiple of five, the difference in enterprise value is EUR 550,000. Same company, same cash flow, presented differently.
What to do before the buyer arrives
The better outcome is not persuading a buyer of the adjustments but having none to make. Where the owner’s salary is brought to market, the rent put on arm’s-length terms and personal costs moved out of the company a year or two before a sale, the accounts the buyer receives already show the normalised picture. The discussion then covers what the business is rather than what it would have been, which is always the stronger position.
Where to go next
- How to value a business
- How to prepare your company for sale
- Due diligence: what buyers look for
- The sale agreement: warranties, escrow and price adjustments
If a sale is on the horizon within two years, normalisation is work worth starting now, because every adjustment is multiplied. A conversation about what is currently depressing EBITDA in your accounts commits you to nothing.