Adjusted EBITDA: The seller vs. buyer tug of war

Is adjusted EBITDA a true reflection of performance, or just wishful thinking?

In M&A, adjusted EBITDA is more than just a financial metric - it’s a battleground. While designed to reflect a business's “true” profitability, it often becomes a tug-of-war between seller optimism and buyer scepticism.

Sellers want to paint the rosiest picture possible. Buyers want to ground that picture in reality. So who’s right?

Seller vs. buyer perspectives: two sides of the same coin

Sellers argue that adjusted EBITDA shows what the business could earn post-transaction - without legacy costs, personal perks, or one-off disruptions. In their view, it’s not about the past; it’s about the potential. They’re selling the ideal future.

On the other hand, buyers are focused on what the business is earning today, not under perfect conditions, but in reality. They want to understand what they’re actually buying. Would the seller still make this adjustment if they were keeping the business?
 
It’s easy to agree on EBITDA in theory - until both sides start adjusting it. This is where deal tension could build: sellers push for recognition potential while buyers guard against overpaying for optimism. That’s when the real negotiation begins.

The great adjustment debate

Adjusted EBITDA starts with the reported base figure, but quickly diverges as both sides add or remove line items. Here are a few examples of where things may get contentious:

• Discretionary expenses may include owner salaries, luxury travel, and long-standing sponsorships. These are typically normalised to market levels or removed as non-operational to present a leaner, more profitable business. But what if the owner wears multiple hats, justifying a higher salary? Or if those sponsorships actually drive customer loyalty? What’s discretionary and what’s simply part of how the business runs?
• Restructuring costs are usually treated as one-time - think layoffs, office closures, or reorganisations. But if a company restructures yearly to hit targets or reset strategy, can those costs be called exceptional? At what point does “non-recurring” start to look like business as usual?
• Pro-forma add-backs for cost savings or synergies often appear in deal models. They reflect projected benefits from initiatives like headcount reductions, system integrations, or lease exits. But here’s the catch: they’re based on future intentions, not current performance. Are those savings actually achievable? Will they materialise on schedule - or even at all? And if they depend on the buyer’s post-deal execution, should they really inflate today’s EBITDA?
• Revenue-related adjustments for lost clients, new contracts, or pricing changes may help “normalise” revenue - but it opens a can of worms. Was the lost client a one-off or a sign of a deeper issue? Will the new deal generate the margin assumed? Adjustments to revenue often rely on assumptions about sustainability and timing. Also, watch out for a one-sided adjustment – if the topline is adjusted, ensure the cost side follows.
• Litigation or legal settlements are typically removed as non-recurring, especially for isolated disputes. However, if the company has a pattern of legal issues, that may indicate an ongoing risk that won’t disappear after the deal.
• FX and hedging adjustments are regularly stripped out, but are they truly non-operational? If the business earns revenue or incurs costs in foreign currencies, FX volatility may be part of the day-to-day reality - not just noise in the numbers.
• Related party transactions such as rent, services, or goods exchanged with affiliated entities are often adjusted to reflect market terms. But how reliable are those benchmarks? And will the buyer inherit the same conditions? These adjustments usually sit in a grey area between fair value and convenience.

These are just a few examples of adjustments that commonly spark debate. Each adjustment comes with a story told to reshape how the business is perceived. But stories can change depending on who's telling them: seller or buyer, optimist or sceptic. The key questions remain: is the adjustment credible, and does it reflect the future reality of running the business?

Valid or opportunistic? The art of the adjustment

Not all adjustments are created equal. Some are valid, backed by documentation, and clearly non-recurring, while others are more speculative.

The key is intent and consistency. Are these adjustments consistently applied and transparently supported? Or are they selectively chosen to shape the valuation narrative?

The Role of Due Diligence

This is where your financial due diligence team steps in. We challenge and validate assumptions, test the rationale for adjustments, support with underlying proof, and build a neutral version of adjusted EBITDA - grounded in facts and future expectations.

Our approach includes:

• Reviewing invoices, contracts, and historical trends
• Interviewing management to understand context
• Assessing repeatability and future impact of costs
• Applying market benchmarking where appropriate

Inflated EBITDA can lead to overvaluation, unrealistic synergies, and poor post-deal performance.

Why It Matters

Valuation, purchase price, and even earn-outs are often tied to adjusted EBITDA. Getting it wrong can mean millions lost. The lesson? Don’t just accept adjustments at face value. Interrogate them. Validate them. Normalise them.

Adjusted EBITDA should reflect commercial reality, not the version of the story that benefits just one side.

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