{"id":846,"date":"2021-09-30T12:35:00","date_gmt":"2021-09-30T12:35:00","guid":{"rendered":"https:\/\/www.southardfinancial.com\/?p=846"},"modified":"2021-10-12T15:26:45","modified_gmt":"2021-10-12T15:26:45","slug":"how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage","status":"publish","type":"post","link":"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/","title":{"rendered":"How to Understand Adjusted EBITDA and Use It To Your Advantage"},"content":{"rendered":"\n

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) has become the standard value metric when it comes time to sell a business.<\/p>\n\n\n\n

It is what both buyers and sellers look to in order to determine the value of the company in question. While many factors come into play when a business changes owners, nothing gives everyone involved a better snapshot of that company\u2019s health and value than its EBITDA.<\/p>\n\n\n\n

Generally speaking, the higher the EBITDA, the higher the price. Valuation companies like ours apply industry-standard multipliers to the EBITDA of the business being sold to arrive at its current market worth. That\u2019s a simplified explanation, however, and things are rarely that clear cut.<\/p>\n\n\n\n\n\n\n\n

Why You Can\u2019t Treat All Businesses The Same<\/h2>\n\n\n\n

If every company was basically the same, we\u2019d be out of a job. Since every business is unique, every transaction has to be handled uniquely.<\/p>\n\n\n\n

Certainly, there are many things that every business will have in common. But when you run a business for any length of time, a lot of irregular items inevitably find their way into the mix. That\u2019s why valuation companies like ours prefer to use Adjusted EBITDA instead.<\/p>\n\n\n\n

What is Adjusted EBITDA?<\/h2>\n\n\n\n

Adjusted EBITDA (also known as \u201cNormalized EBITDA\u201d) is simply a company\u2019s standard EBITDA with any irregular variables added in or taken out.<\/p>\n\n\n\n

This measure gives the parties involved a much more accurate picture of that particular business\u2019s cash flow in comparison to similar companies within their industry.<\/p>\n\n\n\n

How is Adjusted\/Normalized EBITDA Calculated?<\/h2>\n\n\n\n

The formula for Adjusted EBITDA is pretty straightforward, and it looks like this:<\/p>\n\n\n\n

Net Income (E) + Interest (I) + Taxes (T) + Depreciation (D) + Amortization (A) +\/- Adjustments (A) = Adjusted EBITDA<\/strong><\/p>\n\n\n\n

  1. Calculate your standard EBITDA.<\/strong> To do this, you\u2019ll need to pull accurate information from your income statement, cash flow statement, and balance sheet. (Investopedia does a good job covering the question of \u201cWhat is EBITDA?<\/a>\u201d)<\/li>
  2. Add or Subtract Adjustments.<\/strong> While the following list isn\u2019t exhaustive (only a detailed analysis performed by a qualified third-party company can uncover all the appropriate variables), Rarebrain.com lists these items as \u201cThe 7 Most Important EBITDA Adjustments When Selling Your Company<\/a>\u201d:
    1. Owner\u2019s Lifestyle \u2013<\/strong> How much of the business owner\u2019s personal life was treated as a \u201cbusiness deduction\u201d? (For example, was the bass boat used to entertain clients every weekend?)<\/li>
    2. Owner\u2019s Salary & Bonuses \u2013<\/strong> Some owners pay themselves a lot more than a hired CEO would make, and others don\u2019t pay themselves nearly enough. The owner\u2019s salary needs to be compared to market standards based on roles and responsibilities, and then adjusted up or down accordingly.<\/li>
    3. Family Members Wages \u2013<\/strong> If family members of the original owner leave when the business sells, their (often inflated) salary will no longer be an expense.<\/li>
    4. Start-up Costs and One-Time Expenses \u2013<\/strong> Many of the things we buy in business aren\u2019t going to be repeating costs.<\/li>
    5. Lawsuits & Professional Fees \u2013<\/strong> If the company has incurred any legal expenses, coaching, or project fees that aren\u2019t going to be part of the picture moving forward, those need to be accounted for. This also goes for other extraordinary or non-recurring expenses.<\/li>
    6. Rent \u2013<\/strong> Make sure any rent the company is paying is a market rate for the location and type of facility being used by the business.<\/li>
    7. Repairs & Maintenance \u2013 <\/strong>Make sure all capital expenses are considered in the EBITDA calculation. Leaving them out could give you a value that isn\u2019t realistic.<\/li><\/ol><\/li>
    8. Apply Multiples.<\/strong> Once you\u2019ve got an accurate Adjusted EBITDA, it\u2019s just a matter of working with a knowledgeable valuation firm to discover an appropriate multiplier for Adjusted EBITDA. Only then can you get a solid determination of the worth of your business to potential buyers.<\/li><\/ol>\n\n\n\n

      We cover the topic of EBITDA multiples more in this post from March 2020: \u201cWhat You Need to Know About Market Multiples\u201d<\/a>.)<\/p>\n\n\n\n

      Trust an Experienced Pro<\/h2>\n\n\n\n

      When it comes time to buy or sell a business, make sure that you have the most accurate information before you begin. The best way to ensure that the transaction is clean and correct is to partner with a trusted valuation firm.<\/p>\n\n\n\n

      Southard Financial has been helping business owners buy and sell for over 30 years. We\u2019ve worked with almost every industry imaginable, and have served companies that range from small startups to corporate giants.<\/p>\n\n\n\n

      Don\u2019t leave money on the table (or let too much leave your wallet). Schedule a call with our valuation experts<\/a> to make sure you get the best deal possible.<\/p>\n","protected":false},"excerpt":{"rendered":"

      EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) has become the standard value metric when it comes time to sell a business. It is what both buyers and sellers look to in order to determine the value of the company in question. While many factors come into play when a business changes owners, nothing gives […]<\/p>\n","protected":false},"author":3,"featured_media":848,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6],"tags":[],"class_list":["post-846","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog"],"yoast_head":"\nHow to Understand Adjusted EBITDA and Use It To Your Advantage<\/title>\n<meta name=\"description\" content=\"When you run a business, a lot of items find their way into the mix. So valuation companies ask, what is Adjusted EBITDA?\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"How to Understand Adjusted EBITDA and Use It To Your Advantage\" \/>\n<meta property=\"og:description\" content=\"When you run a business, a lot of items find their way into the mix. So valuation companies ask, what is Adjusted EBITDA?\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/\" \/>\n<meta property=\"og:site_name\" content=\"Southard Financial\" \/>\n<meta property=\"article:published_time\" content=\"2021-09-30T12:35:00+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2021-10-12T15:26:45+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.southardfinancial.com\/wp-content\/uploads\/what-is-adjusted-ebitda.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"800\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Southard Financial\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Southard Financial\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"4 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/\",\"url\":\"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/\",\"name\":\"How to Understand Adjusted EBITDA and Use It To Your Advantage\",\"isPartOf\":{\"@id\":\"https:\/\/www.southardfinancial.com\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/#primaryimage\"},\"image\":{\"@id\":\"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.southardfinancial.com\/wp-content\/uploads\/what-is-adjusted-ebitda.jpg\",\"datePublished\":\"2021-09-30T12:35:00+00:00\",\"dateModified\":\"2021-10-12T15:26:45+00:00\",\"author\":{\"@id\":\"https:\/\/www.southardfinancial.com\/#\/schema\/person\/260668c1dd7ed94e23b9dee47819e4c4\"},\"description\":\"When you run a business, a lot of items find their way into the mix. So valuation companies ask, what is Adjusted EBITDA?\",\"breadcrumb\":{\"@id\":\"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/\"]}]},{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/#primaryimage\",\"url\":\"https:\/\/www.southardfinancial.com\/wp-content\/uploads\/what-is-adjusted-ebitda.jpg\",\"contentUrl\":\"https:\/\/www.southardfinancial.com\/wp-content\/uploads\/what-is-adjusted-ebitda.jpg\",\"width\":1200,\"height\":800,\"caption\":\"what is adjusted ebitda?\"},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/www.southardfinancial.com\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"How to Understand Adjusted EBITDA and Use It To Your Advantage\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/www.southardfinancial.com\/#website\",\"url\":\"https:\/\/www.southardfinancial.com\/\",\"name\":\"Southard Financial\",\"description\":\"Business Valuation & Consulting\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/www.southardfinancial.com\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/www.southardfinancial.com\/#\/schema\/person\/260668c1dd7ed94e23b9dee47819e4c4\",\"name\":\"Southard Financial\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.southardfinancial.com\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/secure.gravatar.com\/avatar\/507bdf4de95a3be4ba0ad98de5d93323?s=96&d=mm&r=g\",\"contentUrl\":\"https:\/\/secure.gravatar.com\/avatar\/507bdf4de95a3be4ba0ad98de5d93323?s=96&d=mm&r=g\",\"caption\":\"Southard Financial\"},\"url\":\"https:\/\/www.southardfinancial.com\/author\/southard-author\/\"}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"How to Understand Adjusted EBITDA and Use It To Your Advantage","description":"When you run a business, a lot of items find their way into the mix. So valuation companies ask, what is Adjusted EBITDA?","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/","og_locale":"en_US","og_type":"article","og_title":"How to Understand Adjusted EBITDA and Use It To Your Advantage","og_description":"When you run a business, a lot of items find their way into the mix. So valuation companies ask, what is Adjusted EBITDA?","og_url":"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/","og_site_name":"Southard Financial","article_published_time":"2021-09-30T12:35:00+00:00","article_modified_time":"2021-10-12T15:26:45+00:00","og_image":[{"width":1200,"height":800,"url":"https:\/\/www.southardfinancial.com\/wp-content\/uploads\/what-is-adjusted-ebitda.jpg","type":"image\/jpeg"}],"author":"Southard Financial","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Southard Financial","Est. reading time":"4 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"WebPage","@id":"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/","url":"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/","name":"How to Understand Adjusted EBITDA and Use It To Your Advantage","isPartOf":{"@id":"https:\/\/www.southardfinancial.com\/#website"},"primaryImageOfPage":{"@id":"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/#primaryimage"},"image":{"@id":"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/#primaryimage"},"thumbnailUrl":"https:\/\/www.southardfinancial.com\/wp-content\/uploads\/what-is-adjusted-ebitda.jpg","datePublished":"2021-09-30T12:35:00+00:00","dateModified":"2021-10-12T15:26:45+00:00","author":{"@id":"https:\/\/www.southardfinancial.com\/#\/schema\/person\/260668c1dd7ed94e23b9dee47819e4c4"},"description":"When you run a business, a lot of items find their way into the mix. So valuation companies ask, what is Adjusted EBITDA?","breadcrumb":{"@id":"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/"]}]},{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/#primaryimage","url":"https:\/\/www.southardfinancial.com\/wp-content\/uploads\/what-is-adjusted-ebitda.jpg","contentUrl":"https:\/\/www.southardfinancial.com\/wp-content\/uploads\/what-is-adjusted-ebitda.jpg","width":1200,"height":800,"caption":"what is adjusted ebitda?"},{"@type":"BreadcrumbList","@id":"https:\/\/www.southardfinancial.com\/how-to-understand-adjusted-ebitda-and-use-it-to-your-advantage\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/www.southardfinancial.com\/"},{"@type":"ListItem","position":2,"name":"How to Understand Adjusted EBITDA and Use It To Your Advantage"}]},{"@type":"WebSite","@id":"https:\/\/www.southardfinancial.com\/#website","url":"https:\/\/www.southardfinancial.com\/","name":"Southard Financial","description":"Business Valuation & Consulting","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/www.southardfinancial.com\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/www.southardfinancial.com\/#\/schema\/person\/260668c1dd7ed94e23b9dee47819e4c4","name":"Southard Financial","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.southardfinancial.com\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/507bdf4de95a3be4ba0ad98de5d93323?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/507bdf4de95a3be4ba0ad98de5d93323?s=96&d=mm&r=g","caption":"Southard Financial"},"url":"https:\/\/www.southardfinancial.com\/author\/southard-author\/"}]}},"_links":{"self":[{"href":"https:\/\/www.southardfinancial.com\/wp-json\/wp\/v2\/posts\/846","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.southardfinancial.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.southardfinancial.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.southardfinancial.com\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.southardfinancial.com\/wp-json\/wp\/v2\/comments?post=846"}],"version-history":[{"count":2,"href":"https:\/\/www.southardfinancial.com\/wp-json\/wp\/v2\/posts\/846\/revisions"}],"predecessor-version":[{"id":855,"href":"https:\/\/www.southardfinancial.com\/wp-json\/wp\/v2\/posts\/846\/revisions\/855"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.southardfinancial.com\/wp-json\/wp\/v2\/media\/848"}],"wp:attachment":[{"href":"https:\/\/www.southardfinancial.com\/wp-json\/wp\/v2\/media?parent=846"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.southardfinancial.com\/wp-json\/wp\/v2\/categories?post=846"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.southardfinancial.com\/wp-json\/wp\/v2\/tags?post=846"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}