You may already know that EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. But what is adjusted EBITDA?
Adjusted EBITDA is a measure calculated for a business that assesses the earnings while adding back interest expenses, taxes, and depreciation charges, plus other adjustments. Essentially, it removes irregular, one-time, or non-recurring items that may misrepresent standard EBITDA calculations. By removing anomalies in order to standardize EBITDA means that the resulting adjusted EBITDA is more precise and comparable to the EBITDA of other similar businesses, and to that of the sector overall. It normalizes the EBITDA value to more accurately represent the financial health of the company.
Adjusted EBITDA is commonly used to assess company valuations in mergers and acquisitions. When done properly, these types of adjustments can drive up the value of a company, sometimes quite a bit. So, these adjustments should be made very carefully and with proper due diligence so that the buyer will be able to accept the adjustments as honest and legitimate. Modifications made to EBITDA are usually one-time expenses that will not incur soon after the sale of a business. Keep in mind that if you are selling, these adjustments will face close scrutiny by the buyer of your company.
Things that are typically not included in adjusted EBITDA are non-operating revenue, a one-time gain or loss, restructuring and reorganization charges, unrealized gains and losses, legal expenses, special donations, or impairment of assets.
How Do You Calculate Adjusted EBITDA?
First, standard EBITDA must be calculated. This uses the net income from your company’s income statement. This income includes expenses of interest, taxation and depreciation, and amortization. To arrive at EBITDA value, add all these expenses back to the net income figure.
Next, add all one-time, non-recurring expenses that do not occur regularly. You will also need to add any and all expenses that are unique to your company and typically are not incurred by companies similar to yours in your industry.
Why is it Important?
EBITDA is used as a method to calculate the enterprise value of the company, so it’s obviously pretty important. Adjusted EBITDA is also important because it can have a significant impact on the valuation of your company, with the power to boost multiples quite a bit.
A Review of its Advantages
- Adjusted EBITDA excludes nonrecurring items and abnormalities that distort standard EBITDA
- It can be a more accurate representation of a company’s futureearnings, which is important to buyers that are interested in your business
- It is very helpful when a company is being valued for a merger or acquisition to achieve the most accurate value
- It can be used to easily compare various companies when expenses are unique in nature or not typically incurred by similar businesses