Adjusted EBITDA— Why it Matters More

Selling a business is complicated. A lot of factors go into a buyer’s decision-making process— two critical factors being solid financials and defensible EBITDA.  

What is EBITDA, and how can it affect a successful sale? 

In most instances, buyers derive their value based on a multiple of the company’s earnings before interest, taxes, depreciation, and amortization or “EBITDA.” EBITDA is a metric used to evaluate a company’s earnings without having to factor in financing activities, accounting activities, or tax decisions. It’s a picture of what the company’s earnings look like if operated for maximum efficiency without any consideration of tax mitigation.  

Any quality prospective buyer will thoroughly inspect details comprising EBITDA, specifically through a Quality of Earnings (Q of E) report. During a Q of E due diligence process, there will be a lengthy and detailed list of documents reviewed by the buyer.  

Most buyers utilize GAAP standards (Generally Accepted Accounting Principles) when evaluating financial reports, which is usually a change for companies from their current accounting method— and can affect their EBITDA significantly.  

One of the first things a buyer will review is the income statement for adjustments, allowing them to calculate adjusted EBITDA— a reflection of a post-close run-rate of earnings. This often creates the basis for purchase price negotiations, and the final sale price is usually a multiple of this figure. Common adjustments include one-time events that are unlikely to reoccur, personal expenses that would not be paid after the sale, or items related to the conversion to GAAP basis.  

Additionally, depreciation expense is often adjusted to reflect an accepted book method rather than accelerated depreciation often used for tax reasons, and adjustments related to full accrual can influence adjusted EBITDA.  

Lastly, it’s imperative to consider your balance sheet regarding EBITDA. In a smaller business where profit is the primary focus, items can remain on a balance sheet for years, impacting adjusted EBITDA when discovered during the due diligence process.  

If you’re a business owner considering selling, consider your current financial statements. Preparing for the sale of your business by improving your balance sheet and maximizing EBITDA by implementing GAAP principles will enable you to entice multiple buyers and get the most value for your business. Reach out to the Aberdeen team to learn how we can help you prepare you for the sale of your business.