Adjusted EBITDA
Adjusted EBITDA is a normalized earnings metric that restates EBITDA to show what a business would earn under ordinary ongoing ownership, adding back non-recurring, non-operating and non-market items such as owner compensation above the fully loaded cost of a hired manager, one-time legal settlements, personal expenses run through the business, and related-party rent set off market. Because the conventional treatment adds back only the compensation above what a hired manager would cost, Adjusted EBITDA normally lands below Seller's Discretionary Earnings for the same company, by roughly the amount of that fully loaded cost.
Also called Normalized EBITDA, Adj. EBITDA, Recast EBITDA, EBITDA as adjusted · Last updated 2026-08-07 · All 24 terms
A worked adjustment schedule
An adjustment schedule is a list, not a formula, and every line on it has to be individually defensible. A services company reporting $1,180,000 of EBITDA submits six lines:
- Owner's W-2 compensation and employer-paid benefits of $525,000 against the $185,000 fully loaded cost — salary, payroll taxes and benefits — of a general manager doing the same job: add back the $340,000 excess
- Owner's spouse on payroll with no operating role: add back $72,000
- One-time ERP implementation expensed rather than capitalized: add back $145,000
- Settlement of a single customer lawsuit, not expected to recur: add back $60,000
- Rent paid to the owner's real estate LLC at $28,000 a month against $22,000 market rent: add back the $72,000 annual excess
- Required raise to bring an underpaid key employee to market, which the buyer will have to pay: deduct $48,000
The adjustments net to $641,000. Adjusted EBITDA is $1,180,000 + $641,000 = $1,821,000.
Two features of that schedule are worth copying. First, the owner compensation line adds back the excess above market, not the whole compensation figure — that single choice is what separates Adjusted EBITDA from SDE. Second, the schedule carries a negative adjustment. A schedule with no downward lines on it is a marketing document, and experienced buyers read it as one.
The manager-cost line: Adjusted EBITDA versus SDE
The clean way to hold the two apart is arithmetic. For the company above, SDE adds back the owner's entire $525,000 of compensation and benefits rather than the $340,000 excess, and every other line on the schedule is identical. SDE is therefore $1,821,000 + $185,000 = $2,006,000, and the gap between the two figures is exactly the $185,000 fully loaded cost of the replacement manager.
That relationship is the discriminator. Adjusted EBITDA assumes someone has to be paid to run the business; SDE assumes the buyer is that someone and takes the pay as part of the return. Neither is more correct, and neither carries the same multiple.
The practical consequence is that offers are not comparable until they are restated onto one basis. The same company priced at 3.5x SDE is $7,021,000; priced at 4.5x Adjusted EBITDA it is $8,194,500 — a $1,173,500 spread, about 17 percent, driven entirely by which basis the multiple sits on rather than by any difference of opinion about the business. Applying an EBITDA multiple to an SDE figure overstates value by roughly one fully loaded manager cost times the multiple, which on these numbers is $832,500.
Which adjustments survive review
Buyers, and the quality of earnings accountants they hire, sort every proposed adjustment into three piles: accepted, discounted and struck. The pattern is consistent across the lower middle market.
Accepted almost always: owner compensation above a documented fully loaded market cost, owner benefits such as personal health insurance, vehicles and club memberships, related-party rent variance measured against a market appraisal, and genuinely non-recurring legal or settlement costs with a paper trail.
Discounted or struck almost always: anything labelled one-time that has appeared in more than one year, marketing or development cuts presented as savings, unsupported personal-use allocations of shared costs, and any adjustment whose only evidence is the seller's word. See add-back for the proof each category needs.
The negotiating consequence is direct. At a 4.5x multiple, $200,000 of struck adjustments is $900,000 of purchase price. A schedule built only from defensible lines typically loses less at this stage than one filed at the maximum in the expectation of negotiating down.
Definitions vary, and the variance is negotiated
No accounting standard defines Adjusted EBITDA. It is a negotiated construct, and the same business can carry three different Adjusted EBITDA figures on the same day: the seller's, the buyer's post-diligence version, and the one written into the credit agreement. Public filers presenting a non-GAAP measure are at least constrained by SEC Regulation G and Item 10(e) of Regulation S-K; private-company deals face no equivalent constraint, which is the structural reason the variance is so wide.
The credit agreement version is the one that outlives the deal. Lenders define EBITDA in the contract, usually with an explicit list of permitted add-backs and a cap on the aggregate; in broadly syndicated leveraged facilities that cap has commonly sat around 20 to 25 percent of consolidated EBITDA as of 2026, with a stated realization window for anything forward-looking. Lower-middle-market and SBA credits are far simpler, but the principle holds: the definition that governs covenants is the one in the loan document, not the one in the CIM.
Two adjacent terms are frequently confused with this one. Recasting is the process that produces the adjusted figure; Adjusted EBITDA is one of its outputs. A pro forma adjustment is hypothetical and forward-looking, modelling what earnings would have been under a different structure, while a legitimate Adjusted EBITDA adjustment is historical and factual, removing a distorting item from what actually happened. Mixing forward-looking synergies into an Adjusted EBITDA schedule is the fastest way to lose credibility with a buyer's accountant.