Adjusted EBITDA in the Context of M&A

By: Kerri Blank, CEO, Ludlow Capital Partners, LLC

Dated: June 20, 2025

In mergers and acquisitions (M&A), Adjusted EBITDA is a critical financial metric used by buyers, sellers, and advisors to evaluate the profitability and valuation of a business. It serves as a normalized version of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), modified to reflect a company’s true ongoing earnings power by excluding certain non-recurring, non-operational, or discretionary items.

1. What Is EBITDA?

EBITDA is a proxy for operating cash flow that removes the effects of:

• Interest (financing structure)

• Taxes (jurisdictional or temporary)

• Depreciation and Amortization (non-cash accounting charges)

It’s often used in M&A to compare companies with different capital structures or tax regimes on a more “apples-to-apples” basis.

2. Why Adjust EBITDA in M&A?

Adjusted EBITDA helps potential buyers assess the sustainable earnings of a company by removing:

• Irregular or non-recurring expenses/income

• Owner-related or discretionary spending

• One-time restructuring costs, legal settlements, or COVID-related impacts

• Synergies or savings expected post-transaction

This allows buyers to value the business based on its core operational performance going forward—not just historical results.

3. Common Adjustments to EBITDA in M&A

Category	Example Adjustments
Non-Recurring Items	One-time legal fees, gains/losses from asset sales, settlements
Owner Discretionary	Excessive owner compensation, personal travel expenses
Restructuring Costs	Severance payments, relocation costs, integration expenses
Extraordinary Events	Trump Tariffs, COVID-19 impacts, natural disaster costs
Run-Rate Adjustments	Reflecting full-year impact of new contracts or cost savings
Unrealized Synergies	Projected cost savings from integration (used by buyers)

4. Buy-Side vs. Sell-Side Use of Adjusted EBITDA

• Sell-Side (Sellers & Advisors):

  • Often maximize Adjusted EBITDA to justify a higher valuation.

  • Add back any expenses that can be argued as non-core or non-recurring.

  • Include pro forma adjustments for new initiatives or cost savings.

• Buy-Side (Buyers & Investors):

  • Typically scrutinize and normalize Adjusted EBITDA to avoid overpaying.

  • Reverse or reject adjustments they consider overly aggressive or speculative.

  • May apply their own adjustments to account for synergies or integration costs.

5. Impact on Valuation

Most private company M&A deals use valuation multiples (e.g., EV/EBITDA). A higher Adjusted EBITDA justifies a higher enterprise value:

• Enterprise Value (EV) = Adjusted EBITDA × Valuation Multiple

Thus, at Ludlow Capital Partners we believe that obtaining a seller’s Adjusted EBITDA before going to market directly results in an increased deal price and creates greater leverage in negotiations for sellers.

6. Caution and Risks

• Adjustments can be subjective and are often negotiated.

• Over-aggressive adjustments may reduce credibility or derail trust.

• Quality of earnings (QoE) reports from accounting firms are often commissioned to validate Adjusted EBITDA in deals over a certain size.

7. Sample Adjusted EBITDA Reconciliation Table

This example illustrates how a properly counseled seller adjusts its reported EBITDA to reflect normalized earnings in an M&A context:

Description	Amount (USD)
Net Income	$5,200,000
+ Interest Expense	$300,000
+ Taxes	$150,000
+ Depreciation & Amortization	$400,000
= EBITDA	$6,050,000
+ Adjustments:
Non-recurring legal settlement	$250,000
CEO’s above-market salary (normalized)	$300,000
One-time severance costs	$75,000
Family member payroll not part of operations	$60,000
Non-cash stock compensation (private co.)	$40,000
Impact of new long-term contract (run-rate)	$90,000
= Adjusted EBITDA	$6,865,000

Seller To Do’s:

If you're a seller, keep a detailed schedule of adjustments with documentation (invoices, contracts, org charts, etc.).

Conclusion

Adjusted EBITDA is not a standardized accounting metric but a key tool in M&A to reflect the normalized, future earning potential of a business. Properly prepared, it can justify a strong valuation; poorly justified, it can invite skepticism or lower the buyer’s offer. Both buyers and sellers should be prepared to defend or challenge EBITDA adjustments with clear evidence and logic.

Thus, based on the above Sample Adjusted EBITDA Reconciliation Table, based on the increase from EBITDA to Adjusted EBITDA in the amount of $815,000 and assuming a 10x purchase price multiple, the Seller would receive an increase of $8,615,000 assuming Buyer accepts the proposed adjustments!