What Is Adjusted EBITDA?

Ask ten people what Adjusted EBITDA means and you'll get three textbook answers, five confident guesses and two sudden urges to check their phone. Does anyone really know what this term means or how its applied?

We've covered EBITDA on the Knowledge Hub before (Understanding EBITDA: what is it and why does it matter? | Expert advice ) but never adjusted EDBITDA. In short, it's your profit before interest, tax, depreciation and amortisation, and buyers use it as a rough proxy for the cash your business generates. Adjusted EBITDA takes that number and asks a different question: what would the profits look like in a new owner's hands?

Why adjust at all?

Owner-managed businesses rarely run their accounts the way a corporate buyer would. You might pay yourself less than a market-rate Managing Director would cost, or considerably more. Your spouse might be on the payroll. The company might pay for your car, your pension contributions above the norm, or the box at the cricket. None of this is wrong. It's simply how owner-managed businesses work.

A buyer doesn't care how you chose to take money out of the business. They care about the underlying, repeatable profitability once you've gone. So the accounts get adjusted, item by item, to show that picture. Each adjustment is called an add-back (or occasionally a deduction), and together they form the bridge from your statutory accounts to the number a buyer will actually apply a multiple to.

Common add-backs buyers will accept

Some adjustments are routine and rarely argued over:

Owner remuneration above (or below) market rate. If you pay yourself £250,000 and a replacement MD would cost £120,000, the difference is a legitimate add-back. Note this cuts both ways. If you pay yourself £20,000 for a full-time role, expect a deduction.

Genuine one-off costs. A legal dispute that's now settled, a flood, a failed office move, a large bad debt from a customer that no longer exists. If it genuinely won't recur, it comes out.

Family members on the payroll who don't work in the business, or who are paid above the rate the role commands.

Personal expenses run through the company. Vehicles, travel, subscriptions and the like.

Costs of the sale process itself, including our fees.

Where buyers push back

This is where credibility is won or lost. Buyers see adjustment schedules every week and they know the difference between a fair normalisation and wishful thinking. The adjustments that attract scrutiny include:

"One-off" costs that appear every year. If you've had an exceptional legal cost three years running, it's not exceptional. It's a running cost with a good story.

Future savings that haven't happened yet. "The new system will save us £80k a year" is a projection, not an add-back. Buyers price what has happened, not what might.

Aggressive owner salary adjustments that ignore what it would really cost to replace everything you do. Many owners are the sales director, FD and head of operations rolled into one. One replacement salary rarely covers that.

Marketing or recruitment costs stripped out on the basis that "we won't need to do that again." You will.

Why restraint pays

Here's the point most owners miss. An inflated adjustments schedule doesn't just get negotiated down. It damages trust. If a buyer strikes out three of your add-backs in the first meeting, they start wondering what else in your numbers needs a second look. Due diligence gets longer, warranties get tighter, and the price often drifts down further than the disputed add-backs were ever worth.

A clean, defensible, evidenced schedule does the opposite. It tells the buyer they're dealing with a well-run business and a credible seller, and that confidence shows up in the offer.

The Barnsgate view

We build the adjusted EBITDA position before your business ever goes to market, not after a buyer challenges it. Every add-back is evidenced, every assumption is stress-tested, and anything we can't defend doesn't go in. It's one of the quieter ways an adviser earns their fee: the number that reaches buyers is one that survives contact with due diligence.

If you're thinking about a sale and want to understand what your adjusted EBITDA really looks like, get in touch. The conversation is free and you'll come away knowing your starting position.