Adjusting EBITDA: What a Buyer Adds and Subtracts Before Making an Offer

Twenty-four months: that is, as an order of magnitude, how long it takes to produce the number a buyer will use to calculate the offer for your company, and that number is not the EBITDA printed in your accounts. It is an EBITDA rebuilt line by line from yours: what weighed on the result without belonging to the business gets added back, what inflated it without being repeatable gets taken out. The multiple everyone talks about applies to that figure and to no other. And like almost everything in a succession, it is settled before anyone has mentioned a price.

T-24 months: the last financial year that still counts

A buyer generally looks at the last three closed financial years, with far more weight on the most recent one and on the trailing twelve months. What you decide today is therefore already inside the window. This is the moment to stop keeping your books for the tax office: the salary you pay yourself, the rent the company pays to your property company, the car, the entertainment expenses, your spouse's position. Every one of those lines will be adjusted anyway. The only open question is whether you adjust it, with documents, or the buyer does, with a reading of his own.

Picture a precision engineering firm of 25 people in Aargau, a hypothetical case, not a client. Published operating result before depreciation: CHF 900,000. The owner pays himself CHF 130,000 a year, a figure set fifteen years ago and never revisited; replacing what he actually does, general management, key accounts and technical follow-up, would cost between CHF 220,000 and 260,000. The buyer will subtract the gap, and the multiple will do the rest. In the other direction, the CHF 180,000 rent paid to the owner's property company, above market, will be brought back to market level, and EBITDA will rise by the difference. Two lines, two directions, and a result that looks neither like the published figure nor like what either side hoped for.

T-12 months: build your own bridge

A year before opening any discussion, you build the bridge from published EBITDA to normalised EBITDA, and you document it. The admissible add-backs always belong to the same family: genuinely non-recurring costs (a settled lawsuit, a relocation, a completed restructuring), private expenses run through the company, the gap between your pay and market pay where you are overpaid, extraordinary depreciation, the sponsorship of your child's club. The deductions, which you are well advised to write down yourself before they are imposed on you: exceptional income (the sale of a machine, the release of a provision, a one-off subsidy), a family member underpaid for what they do, a sweetheart rent below market, and the cost of positions that do not exist yet but that the company will have to fund without you, a finance director for instance.

Every line carries a document: a contract, an invoice, a statement. A normalisation without evidence is not a normalisation, it is an opinion. In the mandates I run, the bridge a seller prepares alone tends to contain generous add-backs and no deductions; the buyer's, the reverse. The work of this phase is to make yours honest enough to stand up against his.

T-6 months: the file shows the bridge, not the number

In the information memorandum, the temptation is to show only the normalised EBITDA. It is paid for later. A serious buyer wants to see both columns and the path between them; if the normalisations add up to more than, say, a quarter of published EBITDA, he stops reading the file as a presentation and starts reading it as a thesis to take apart. The bridge then covers three financial years, consistent from one year to the next, where "non-recurring" does not describe a cost that comes back every year under a different name.

This is also where you settle the multiple you will carry in your head, and therefore what each line of the bridge is worth. At a multiple of five to seven, a common range for a profitable Swiss industrial SME, CHF 100,000 of contested adjustment weighs between CHF 500,000 and 700,000 of price. Few items in a negotiation carry that leverage, and almost none is prepared so poorly.

T-3 months: the indicative offer, and what the buyer corrects

The letter of intent arrives with a price, and that price rests on a reference EBITDA the buyer has set, not you. What he usually accepts: documented add-backs, the owner's pay brought to market level in both directions, obvious private expenses. What he refuses: the synergies he will realise himself after the takeover and that you would like him to pay for in advance, the "exceptional projects" that keep recurring, the savings you have not yet made.

And what he adds to the deduction list from his side: the cost of a full management team to replace what you did without charging for it, a catch-up budget (IT, compliance, deferred maintenance) turned into an annual cost, sometimes a discount on a final year that looks too good next to the two before it. That reference figure belongs in the letter of intent, together with the method that leads to it. A letter that states a price without saying which EBITDA it rests on leaves due diligence free to recalculate it, and due diligence never recalculates upwards.

T-0: financial due diligence, what survives

Between the letter of intent and the contract, the buyer usually mandates an auditor or a transaction team for a quality of earnings review. It redoes your bridge line by line, with your documents and without your commentary. What falls most often: add-backs without evidence, so-called one-off costs present in all three years, exceptional income you had not deducted. What gets added: a definition of net debt wider than yours, taking in dividends declared but unpaid, underfunded pension commitments, deferred taxes, and the normative working capital that will adjust the price at closing.

At this stage every line lost translates directly into price, multiplied. A bridge built at T-12 with its documents loses little; a bridge improvised at T-3 to answer the offer loses a lot, and above all it loses the credibility of the rest of the file, because the buyer concludes that the other numbers deserve the same treatment.

Closing and after: the adjustments that become clauses

Three lines of the bridge do not disappear at signing; they change nature. The market salary used to replace you becomes the pay of the successor or of the director he appoints, and if you stay on for a few months, your own. The market rent becomes a lease, signed before closing, between the company sold and the property company you keep. And if part of the price depends on an earn-out, the EBITDA that measures it has to be defined in the contract with the same adjustment rules that set the price: otherwise the buyer adjusts his own way for two years, and the earn-out is calculated on a figure you no longer recognise.

What stands out, rereading the calendar, is that the buyer holds the pen for only three months out of twenty-four. The rest of the time, it is you. An owner who discovers the adjustments in the letter of intent negotiates on the other side's number; one who built them two years earlier negotiates on his own, and the gap between the two reads directly in the price.