EBITDA Adjustments: What PE Investors Accept (and Reject)
The difference between legitimate normalization and deal-killing aggression.
Key Takeaways
- •Not all EBITDA adjustments are created equal—credibility matters
- •The best add-backs are well-documented, clearly non-recurring, and easily verified
- •Aggressive adjustments don't just get rejected—they make buyers question everything
- •Focus on defensible adjustments that any reasonable buyer would accept
Adjusted EBITDA is the foundation of most PE valuations. The difference between reported EBITDA and adjusted EBITDA can represent millions in transaction value. But not all adjustments are viewed equally—aggressive add-backs destroy credibility and can kill deals.
Understanding what PE investors accept helps you present adjustments that maximize value while maintaining credibility throughout the transaction process.
Commonly Accepted Adjustments
These adjustments are standard in PE transactions and rarely face significant pushback when properly documented.
Owner Compensation Normalization
Adjusting owner compensation to market rate is universal. If you pay yourself $500K when market rate for a CEO in your industry/size is $300K, the $200K difference is a legitimate add-back. Document with compensation surveys.
One-Time Professional Fees
Transaction-related costs (investment banker, legal, accounting for the deal) are clearly non-recurring. Also includes fees for non-recurring projects like ERP implementation or one-time audit work.
Non-Recurring Legal/Litigation
Settlement costs, litigation defense, and related legal fees for matters that are resolved or will be resolved at closing. Ongoing legal exposure may require escrow or indemnification instead.
Facility Closure or Consolidation
Costs from closing a facility, consolidating operations, or exiting a market that won't recur. Severance, lease termination, and relocation costs qualify when clearly documented.
Personal Expenses Through Business
Owner vehicles, travel, club memberships, and similar personal expenses run through the business. Document specifically what will be eliminated post-close.
Related Party Rent Above Market
If you rent your facility from a related entity at above-market rates, the excess can be added back. Requires market comparable support. Note: below-market rent may result in a deduction.
Typically Rejected Adjustments
These adjustments are viewed skeptically and often rejected entirely. Including them damages credibility with buyers.
Pro Forma Revenue Adjustments
Adding back EBITDA for "full-year impact" of customers signed mid-year, or projecting revenue from "pipeline" that hasn't closed. Buyers won't pay for revenue you haven't earned.
Unimplemented Cost Savings
"We could save $500K by renegotiating this contract" isn't an adjustment— it's a hope. Until savings are realized and reflected in financials, they have no place in adjusted EBITDA.
Recurring "One-Time" Costs
If something appears every year, it's not one-time. Three years of "non-recurring restructuring" or annual "one-time" legal costs suggests these are actually ongoing operating expenses.
Excessive Management Bonuses
Adding back large bonuses as "discretionary" when they're actually part of competitive compensation raises questions. If you need to pay bonuses to retain talent, they're not truly discretionary.
R&D or Marketing as One-Time
Treating product development or marketing campaigns as non-recurring when they're essential to business operations. These are investments the business needs to make ongoing.
COVID Normalization (2024+)
By now, COVID-related adjustments are largely exhausted. Attempts to "normalize" for pandemic impacts years later look like reaching for add-backs.
Gray Area Adjustments
Some adjustments fall into gray areas where acceptance depends on documentation quality, materiality, and negotiation dynamics.
Public Company Costs
If you're a public company going private, compliance costs may qualify. But buyers will scrutinize whether similar compliance will be required post-close.
New Hires Not Yet Productive
Recent hires whose full productivity isn't reflected in financials may justify partial add-back, but proving expected contribution is difficult.
Natural Disaster/Unusual Events
Costs from truly unusual events may qualify, but frequency of "unusual" events and business location (hurricane zone, earthquake region) affect acceptance.
Stock Compensation
Non-cash stock-based compensation is typically added back to EBITDA, but buyers will evaluate whether cash compensation will need to increase post-close.
How to Document Adjustments
Strong documentation is as important as the adjustment itself. Well-supported add-backs are accepted; poorly documented ones invite pushback.
Documentation Best Practices
The Credibility Rule
Ask yourself: "Would I accept this adjustment if I were the buyer?" If the answer is "probably not," don't include it. The short-term gain of an inflated EBITDA isn't worth the credibility cost when buyers push back.
Negotiating Adjustments
Adjustment negotiation is a normal part of PE transactions. Here's how to approach it:
- Start reasonable: An aggressive opening position invites line-by-line challenge
- Prioritize material items: Don't fight for $20K adjustments in a $5M EBITDA deal
- Have backup documentation: Buyers respect sellers who can immediately support claims
- Accept legitimate challenges: Conceding on weak adjustments builds credibility for strong ones
- Consider compromise: Splitting disputed adjustments is often better than protracted negotiation
Related Resources
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