Adjusted EBITDA refines the standard reported EBITDA calculation by excluding unusual, proprietorial or non-recurring items, to form a clearer picture of operational profitability.  

Adjusted EBITDA is typically multiplied by a market multiple to generate the enterprise value of the business. The adjustment offers a normalised measure of ongoing operating performance, making it easier to compare with other companies or industry benchmarks.

If you need support, our Corporate Finance Team at Rickard Luckin will help you both calculate and assess the adjusted EBITDA of your business.

How to calculate reported EBITDA

The basics of calculating reported EBITDA (before adjustments) are as follows:

EBITDA = net profit + interest + tax + depreciation + amortisation

This formula strips away the effects of financing decisions, tax environments and accounting practices, to focus solely on operational profitability.

Adjusting EBITDA: explained

Using the reported EBITDA as a starting-point, you can add back (or deduct in some cases) exceptional costs, to provide a more accurate representation of your company's recurring operational performance.

Typical adjustments include the following:

1. Non-recurring items
   These are one-time gains or losses that are not expected to reoccur. Examples include legal settlements, disaster-recovery costs resulting from an unexpected event, or gains (or indeed, losses) from the sale of business assets.
   
2. Non-cash items
   Adjustments for non-cash items ensure that EBITDA reflects only cash-based operational performance. Such adjustments might include expenses related to employee options or grants, or impairment charges: write-offs of goodwill or other intangible assets.
   
3. Proprietorial related expenses
   For privately-held companies, personal expenses of the owners paid through the business can distort EBITDA. Adjusting for these can include:
   - Owner’s salary: adjust to market rate if the owner’s salary is significantly above or below market rates, or if the remuneration structure is complex.
   - Personal costs: remove personal expenses like travel or car expenses that are not related to business operations, or any other costs that the business will no longer incur post sale.
   
4. Restructuring costs
   Costs associated with business restructuring, such as redundancy and relocation, are often adjusted out of EBITDA.
   
5. Other adjustments
   Depending on the specific business and industry, various other adjustments may be necessary.  These might include currency exchange rate fluctuations, and extraordinary revenue or expenses that do not form part of normal business operations.

Adjusted EBITDA is a key tool for understanding a company’s value. By removing non-recurring, non-cash and personal expenses, it offers a clearer, more consistent metric for comparison and valuation.

Whether you're a business owner preparing for sale, an investor evaluating an opportunity, or a financial analyst seeking accurate performance metrics, mastering adjusted EBITDA is essential for informed decision-making.

Our Corporate Finance Team at Rickard Luckin is ready to support you in calculating and assessing the adjusted EBITDA of your business, so you can explore your intended next steps with confidence.