EBITDA Adjustments: Types, Examples & Best Practices
Updated February 2026
Every dollar of earnings misstatement is amplified by the valuation multiple. At 5x EBITDA, a $100K overstatement costs the buyer $500K.
EBITDA adjustments are the heart of every Quality of Earnings analysis. They transform reported earnings into normalized EBITDA — the figure that actually determines what a business is worth. Getting adjustments right (and documenting them properly) is the difference between a defensible analysis and a deal that falls apart in diligence.
What Are EBITDA Adjustments?
EBITDA adjustments are modifications to a company's reported earnings that account for items that don't reflect the business's ongoing, normalized earning power. In M&A, the adjusted EBITDA figure is what buyers use to determine enterprise value — typically by applying a valuation multiple.
Adjustments can increase or decrease EBITDA. An add-back (e.g., owner's above-market salary) increases adjusted EBITDA, while a subtraction (e.g., below-market rent from a related party) decreases it.
EBITDA Adjustment Categories
Professional QoE analyses organize adjustments into standard categories:
Owner / Seller Discretionary
Above-market owner compensation, personal expenses, family members on payroll, owner-funded benefits
Non-Recurring / One-Time
Litigation settlements, disaster costs, one-time professional fees, COVID disruptions, insurance proceeds
Pro Forma Adjustments
Annualizing mid-period contracts, price increases, new hires/terminations, facility changes
Related-Party Transactions
Below/above-market rent, non-arm's-length services, management fees to holding companies
Accounting Policy
Revenue recognition timing, capitalization vs. expensing, inventory valuation, accrual vs. cash differences
Common EBITDA Adjustment Examples
Here are the adjustments that appear in nearly every QoE analysis:
- Owner compensation normalization: Replace owner's actual compensation ($400K) with market-rate for a GM ($175K) = $225K add-back
- One-time legal fees: $85K settlement and legal fees for a resolved lawsuit = $85K add-back
- Related-party rent: Company pays $3K/month rent to owner; market rate is $5K = $24K subtraction (annual)
- Personal vehicle expenses: Owner's personal vehicle lease, insurance, and fuel = $18K add-back
- PPP loan forgiveness: $150K recognized as other income = $150K subtraction (non-recurring revenue)
- New contract annualization: $500K contract signed in month 9 = pro forma to $500K full year revenue impact
How to Document EBITDA Adjustments
Every adjustment should include:
Description
Clear explanation of what the adjustment is and why it's necessary
Category
Which type of adjustment (owner, non-recurring, pro forma, etc.)
Amount
The dollar impact on EBITDA for each period analyzed
Direction
Whether it's an add-back or subtraction
Supporting evidence
Source documents, calculations, third-party comparables
Rationale
Why a reasonable buyer would agree this adjustment is appropriate
Shepi's AI assistant helps structure adjustment documentation and flags when supporting evidence is insufficient.
Red Flags in EBITDA Adjustments
Adjustments exceed 30–40% of EBITDA
Raises questions about the reliability of the underlying financials
"Non-recurring" items that recur
If legal fees or equipment repairs appear every year, they're recurring
Missing documentation
Adjustments without evidence are just assertions
Aggressive revenue add-backs
Claiming lost revenue that "should have" occurred
Inconsistent methodology
Applying different standards across periods
Round numbers everywhere
Real adjustments rarely land on neat figures
Best Practices
Be conservative
When in doubt, err on the side of not making an adjustment. Aggressive add-backs undermine credibility.
Use multiple periods
Analyze 3+ years to identify trends and validate non-recurring claims.
Document everything
If you can't support it, don't adjust for it.
Consider the buyer's perspective
Would a reasonable buyer agree this adjustment is appropriate?
Separate opinion from fact
Clearly distinguish between adjustments based on hard evidence vs. judgment calls.
Use consistent categories
Standardized taxonomy makes it easier to communicate findings to all deal parties.