A structured overview of EBITDA adjustments in FDD: what they are, why they matter, and how analysts categorise them in QoE reports.
EBITDA adjustments sit at the heart of every Financial Due Diligence (FDD) engagement. They transform a company's reported earnings into a figure that genuinely reflects the underlying economic performance of the business — and they directly influence the acquisition price paid by a buyer.
An EBITDA adjustment is any modification made to the reported EBITDA of a business to arrive at a "normalised" or "adjusted" EBITDA. The goal is to strip out items that distort the true recurring profitability of the company.
In a Transaction Services context, adjustments are presented in a Quality of Earnings (QoE) report and are subject to scrutiny from both the buyer's and seller's advisers. The final agreed figure feeds directly into the valuation multiple applied at deal close.
These are one-off costs or revenues that are unlikely to repeat in future periods. Classic examples include:
The key test is whether a reasonable buyer would expect the item to recur. If not, it is typically adjusted out of EBITDA.
Run-rate adjustments account for structural changes to the business that occurred mid-period. If a company hired 20 additional sales staff in October of the reporting year, the full-year cost impact is not yet visible in the historical P&L. A run-rate adjustment annualises that cost.
Similarly, if a business opened a new facility in Q3, the revenue from that facility for the full year should be reflected in the adjusted EBITDA.
Pro forma adjustments reflect changes that will happen post-closing or that relate to acquired/disposed businesses. Examples include:
In every deal, management presents its own version of adjusted EBITDA, often with optimistic add-backs. The FDD team's role is to critically review these, challenge unsupported items, and arrive at a supportable adjusted EBITDA. The difference between management's figure and the adviser's figure is always a key discussion point.
Mastering EBITDA adjustments is non-negotiable for anyone entering Transaction Services. The ability to identify, quantify and argue each adjustment — both orally in interviews and in writing in QoE reports — sets strong candidates apart from average ones.
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