What Is Adjusted EBITDA?

Adjusted EBITDA, Defined

Adjusted EBITDA is EBITDA further adjusted for one-time, non-recurring, and owner-discretionary items to reflect a business's true ongoing earning power. Where EBITDA strips out interest, taxes, depreciation, and amortization, Adjusted EBITDA goes a step further, normalizing the numbers by removing unusual or non-operating items so buyers can see sustainable, run-rate profitability. It's the figure most often used to value mid-market businesses.

Why Buyers Use It

Raw EBITDA can be distorted by things that won't continue under new ownership, a one-time lawsuit, a discontinued product line, an owner's above-market perks, or a non-recurring windfall. Buyers want to know what the business will actually earn going forward, not what a single unusual year showed. Adjusted EBITDA answers that by removing the noise, giving a cleaner basis for applying a multiple and comparing the business to others.

Common Adjustments

• One-time / non-recurring expenses or income — lawsuits, restructuring, one-off events
• Owner-discretionary items — above-market owner compensation, personal expenses, perks
• Non-operating items — income or costs unrelated to core operations
• Normalization to market rates — adjusting below- or above-market rent or salaries to market

These are essentially add-backs applied on top of EBITDA, each of which must be legitimate and documented.

Adjusted EBITDA vs. SDE

For larger, management-run businesses, Adjusted EBITDA is the metric of choice. For smaller owner-operated businesses, SDE is used instead, the main difference again being that SDE adds back owner compensation while Adjusted EBITDA generally normalizes it to a market-rate manager's salary. Both aim at the same goal: revealing true, sustainable earning power. See SDE vs. EBITDA.

Adjustments Get Scrutinized

As with all earnings adjustments, buyers examine every Adjusted EBITDA item in due diligence — often through a formal "quality of earnings" analysis for larger deals. Legitimate, well-supported adjustments hold up and support the valuation; aggressive ones get removed and lower the price. Presenting clean, defensible Adjusted EBITDA is central to achieving full value for a mid-market business.

Frequently Asked Questions

Martin Navarro · Business Broker & M&A Advisor

Martin Navarro advises business owners across Los Angeles, Ventura, and Southern California on selling, buying, and valuing privately held companies. A U.S. Marine Corps veteran with dual CSUN degrees in Business Management and Accounting, he brings hands-on transaction experience and a straight-talking, numbers-first approach to every engagement. Bilingual in English and Spanish.