What is adjusted EBITDA and why does it matter in a sale?
Buyers and sellers of privately held Canadian businesses constantly work to understand and agree on adjusted EBITDA, and it is almost always a back-and-forth to settle what counts as an acceptable adjustment. Adjusted EBITDA measures a company's core cash earnings: it takes EBITDA (earnings before interest, taxes, depreciation and amortization) and makes further adjustments for expenses or revenues that are not core or essential to operations.
What gets adjusted? Common adjustments include one-off events, personal expenses, above-market compensation, benefits, perks and intercompany transactions — added back or removed to reflect the true earning power of the business.
Why is it contentious? Buyers and sellers often disagree on what constitutes an acceptable adjustment:
- As a buyer — carefully evaluate whether each proposed adjustment is truly non-core or non-recurring to the business being purchased
- As a seller — accurately identify and include the most relevant adjustments to present stronger, defensible earnings
Operational decisions, such as whether to buy or lease equipment, can also affect EBITDA. Because adjustments feed directly into a multiple-based price, expert guidance helps both sides reach a figure they can defend.
Key facts: adjusted EBITDA
Adjusted EBITDA = EBITDA further adjusted for non-core or non-recurring items
Common add-backs: one-off events, personal expenses, above-market compensation, perks, intercompany transactions
Buyers scrutinize adjustments for legitimacy; sellers maximize relevant, defensible add-backs
Operational choices like buy-versus-lease affect EBITDA, and adjustments drive the final price
Disclaimer: This article is for general informational purposes only and does not constitute legal, tax or financial advice. Consult qualified advisors regarding your specific circumstances.
