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How to calculate your normalised EBITDA before selling your business
What is normalised EBITDA and why does the buyer recalculate it?
El standardized EBITDA is an estimate of a company’s recurring operating profit, after adjusting for items that distort the period under review: non-recurring revenue, exceptional expenses, missing costs or accounting policies that bring forward results. When a company is sold, this is the figure to which the buyer applies the valuation multiple; therefore, every adjustment is directly reflected in the price.
An example illustrates the significance of this. If you report an EBITDA (earnings before interest, tax, depreciation and amortisation) of 1.5 million euros and the buyer offers eight times that figure, the enterprise value is 12 million. If, upon review, the buyer reduces the EBITDA to 1.3 million, the value becomes 10.4 million using the same multiple: 1.6 million fewer, without the multiple having changed (and before deducting debt and other adjustments that determine what shareholders receive).
In sales processes , it is common for these discussions to arise in the middle of negotiations and to wear down owners who know their business inside out. The root cause is usually the same: a lack of prior review to anticipate the buyer’s questions. In case you’re not yet familiar with it, we’ve published a 6-step business plan on our M&A Academy to help you win the buyer’s trust.
Your accounts show the results for a specific period. The buyer uses them to estimate what profit they will be able to retain following the acquisition, and to do so, they review which revenue streams will continue and which costs they will have to keep paying.
Having audited accounts helps, but reviewing a purchase raises another question: how much of that outcome is sustainable. That is why it is possible to have audited accounts and still discuss adjustments. Furthermore, there is no universal list of items that all buyers accept; each adjustment must be explained and documented.
The buyer will carry out their own analysis during the due diligenceprocess, which involves a thorough review of the company prior to completion. Your advantage will be that you are aware of the differences in advance and can discuss them in an informed manner.
Five adjustments that can affect your normalised EBITDA
The adjustments that have the greatest impact on a technology company’s normalised EBITDA tend to fall into five categories. This table summarises what the buyer looks at in each category and what documentation it is advisable to have ready:
| Adjustment | What the buyer checks | What documentation supports this? |
|---|---|---|
| Revenue invoiced in advance | If the payment relates to a service that has already been provided | Contracts, invoices and a breakdown of services provided by project |
| Capitalised development | What proportion of EBITDA comes from capitalising costs, and how much is required to maintain the product? | Projects launched, requirements met and cost calculations |
| Recurring exceptional expenses | If the business will have to bear similar costs every year | Invoices, settlement agreements and historical trends for these items |
| Unconsolidated savings | Has the savings scheme been implemented, and since when? | Terminated or renegotiated contracts and implementation costs |
| Owner’s remuneration | How much will it cost to fill these roles at market rates? | Job description and estimated replacement cost |
Adjustment 1: Invoiced revenue for services you have yet to provide
If, in June, you invoice 12,000 euros for a twelve-month subscription and provide the service throughout that period, the revenue is recognised at a rate of 1,000 euros per month. Charging in advance improves cash flow, but it does not mean that the entire invoice amount is recognised as profit for that month. Recognising it all at once boosts the EBITDA for one financial year at the expense of the next, and the buyer will adjust the figures accordingly. In Spain, the criteria for recognising revenue from the provision of services are set out in the ICAC Resolution of 10 February 2021.
For technology services, the buyer will also verify that the revenue from each project corresponds to the work performed: prepare a breakdown that links contracts, invoices, and services rendered.
Adjustment 2: Capitalised development costs
Capitalizing a cost means recording it as an asset rather than as an expense for the period. When a software company capitalizes development costs, its EBITDA may be higher than if it had recorded them as expenses, even though the cash outflow is the same.
This treatment may be correct (the ICAC Resolution of May 28, 2013 , establishes the requirements for capitalizing development expenses), but you must explain which projects have been capitalized, which requirements they meet, and how their costs were calculated. The buyer will also want to know how much the company must invest each year to maintain the product, and may accept the accounting treatment but question its impact on profitability. Present that expense separately to address each objection accurately.
Adjustment 3: One-off expenses that recur every year
Excluding fees related to an exceptional legal dispute from EBITDA may make sense if the matter has been resolved and you can demonstrate that it is not part of your normal business operations. The situation changes if different expenses are excluded each year: legal fees, compensation payments, or consulting fees. Even if each invoice is a one-time occurrence, the business may need to incur similar costs on a
The key question is whether the buyer will have to pay an equivalent amount to continue operating. The same principle applies to extraordinary income: a one-time subsidy boosts earnings without representing a recurring profit.
Adjustment 4: Savings announced but not yet achieved
If you want to include the savings from closing an office or renegotiating with a supplier in your normalized EBITDA, you’ll need to show what has been implemented and when: a lease agreement that has already been terminated provides more evidence than a mere intention. Also include the costs necessary to achieve those savings.
With a new customer, a signed contract may warrant analyzing its annual impact, provided that the cost of serving the customer is included. Keep these impacts separate from historical results and avoid counting the same profit twice.
Adjustment 5: The owner’s remuneration
It is common for the owner to run the business and handle sales while receiving compensation below market rates. The buyer will need to know how much it will cost to fill those roles once you leave. The opposite may also be true: compensation above market rates or personal expenses paid by the company.
Any adjustment requires identifying what is being eliminated and what will need to be replaced. Your compensation cannot be eliminated entirely as long as your tasks remain necessary: describe what you do and estimate a reasonable cost to cover it.
Why turning up unprepared weakens your negotiating position
Going into a sale without a normalized EBITDA figure gives the buyer the upper hand regarding the numbers, and the doubts extend beyond the final calculation. If a management report shows one margin and the annual financial statements show another, the buyer will request a reconciliation—that is, an explanation that links the two figures. If this cannot be provided, the buyer will expand the scope of its due diligence.
The team will have to search for documentation while continuing to serve customers, and the process may be delayed and the conditions may become stricter.
El riesgo aumenta tras firmar una The risk increases after signing an exclusive letter of intent—the document that sets forth the main terms of the offer and prevents you from negotiating with other buyers for a certain period. Receiving a significant objection at that point may force you to make a decision under pressure.
Preparing your EBITDA in advance allows you to correct errors and distinguish between a valid objection and a proposal worth discussing. Even if some adjustments lower your figure, knowing about them beforehand allows you to negotiate from a more reliable basis.
Five steps to building a defensible EBITDA figure before selling your business
Step 1: Set a budget that suits your finances
Gather the financial statements for the last three fiscal years and the most recent monthly breakdown, and verify that the EBITDA you report can be derived from the accounting records. Explain the differences between annual financial statements and management reports. Use a consistent definition across periods.
Paso 2: Separa el beneficio recurrente de las partidas excepcionales
Review revenue recognition, capitalized development, and operating costs, and identify expenses and revenues that distort ordinary income. Include both positive and negative adjustments: a calculation that only increases profit warrants particularly careful review.
Step 3: Prepare a worksheet for each setting
Record the amount, the period, and the accounting account; explain the reason and whether it is likely to recur; and attach the supporting document (invoice, contract, pay stub, or settlement agreement). If you’re including a recent cost savings, document the date it was implemented. If any supporting documentation is missing, assign someone the task of obtaining it before submitting the figure.
Step 4: Explain how profit is converted into cash
Prepare a table showing investments and working capitalneeds—the resources the business ties up in its day-to-day operations. Break down the capitalized costs to show how much cash is required to maintain the product. This helps explain why an accounting profit can coexist with low cash on hand.
Step 5: Take a look at it from a buyer’s perspective
Ask someone with experience in transactions to review your adjustments: whether the expense actually disappears, whether the revenue can be verified, and whether any necessary costs are missing. Depending on the size and complexity of the transaction, it may be advisable to conduct an external review of the quality of earnings, which helps identify discrepancies before negotiations and prepare documented responses.
Preparing EBITDA for a defensible valuation
A company's price depends on both the multiple and the profit to which it is applied. A standardized EBITDA figure prepared in advance (documented adjustment by adjustment and reconciled with your financial statements) reduces the buyer's ability to impose its own calculation.
The starting point is clear: meet with your CFO or accounting advisor and ask for a table that compares reported EBITDA with normalized EBITDA, starting with the most recent fiscal year and the most recent period available. Review each discrepancy, ask for supporting evidence, and assign a person to follow up on each outstanding issue.
When the buyer's review comes in, you'll have documents to respond to and time to evaluate their proposals. With the history clearly explained, the next step will be to demonstrate that your growth projections are just as solidly grounded.
If you want to review your financials from a buyer’s perspective before entering the market, Baker Tilly’s Ready4Exit method includes a financial assessment (profit quality, normalizations, and net debt) and an action plan to address any discrepancies before entering into negotiations.