Normalised EBITDA

What Is Normalised EBITDA?

Normalised EBITDA is the adjusted earnings before interest, tax, depreciation, and amortisation of a business — adjusted to remove items that are specific to the current owner, non-recurring in nature, or otherwise not reflective of the business’s sustainable earnings power under new ownership.

The starting point is reported EBITDA. From that base, the seller’s accountant or M&A advisor adds back (or removes) items that distort the true earnings run rate. The result — normalised EBITDA — is the figure applied to a sector EBITDA multiple to calculate enterprise value.

Why it matters: A business with reported EBITDA of A$2 million might have normalised EBITDA of A$3.5 million once legitimate adjustments are made. At a 7x multiple, that difference is worth A$10.5 million in acquisition price.

Common Normalisation Adjustments

Add-Backs (items removed from costs to increase EBITDA)

Adjustment	Description
Owner’s above-market remuneration	If the owner pays themselves A$800K but a professional replacement manager would cost A$300K, the A$500K excess is added back
Non-recurring professional fees	Legal costs from a one-off dispute, restructuring fees, or pre-sale advisory costs
Owner personal expenses run through the business	Vehicle, travel, entertainment, insurance — items that are personal but expensed to the company
Related-party transactions at off-market rates	Rent paid to a related-party property trust above market rate, or below-market management fees
One-off marketing or development costs	A campaign or project that won’t recur under new ownership
COVID-specific costs or JobKeeper receipts	Pandemic-era support payments or extraordinary costs are excluded from run-rate EBITDA
Non-cash items that are not recurring	Write-offs, inventory write-downs, or provisions that do not reflect ongoing operations

Deductions (items added to costs to reduce EBITDA)

Adjustment	Description
Below-market owner salary	If the founder has paid themselves A$80K when a replacement manager would cost A$280K, the gap is deducted
Missing costs for services provided by the owner	Owners who provide consulting, IT support, or property management without charging the business — those services have a market cost
Non-arm’s-length supplier arrangements	Below-market pricing from a supplier who is also a related party — buyers will replace that arrangement at market rates

Normalised EBITDA vs Seller’s Discretionary Earnings (SDE)

Seller’s Discretionary Earnings (SDE) and normalised EBITDA are related concepts but apply to different transaction sizes.

	Normalised EBITDA	SDE
Typical business size	EBITDA above A$2–3M; buyer is an institution or strategic	EBITDA below A$2M; buyer is an owner-operator
Owner’s salary treatment	Replaced by market-rate CEO cost	Entire owner salary added back (buyer is buying a job too)
Buyer type	PE fund, strategic acquirer	Individual buyer, small strategic
Multiple basis	Institutional sector multiples (5–14x)	Lower owner-operator multiples (2–4x)

Normalised EBITDA and the Quality of Earnings Process

Sophisticated buyers — particularly private equity funds — commission an independent quality of earnings (QoE) review as part of due diligence. The QoE report independently verifies the seller’s normalisation adjustments, tests each add-back for legitimacy, and may identify additional adjustments the seller did not disclose.

Common QoE findings that reduce normalised EBITDA from the seller’s initial claim:

• Revenue recognised in the wrong period
• Capitalised costs that should be expensed
• Aggressive management of accruals or provisions
• Under-accrued liabilities discovered during the review
• Recurring items incorrectly classified as one-offs

Sellers who prepare their normalisation schedule rigorously — and who can defend each adjustment with documentation — reduce the risk of price renegotiation during due diligence. An M&A advisor prepares the normalised EBITDA schedule as part of the information memorandum and supports the seller through QoE scrutiny.

LTM vs NTM Normalised EBITDA

Buyers typically evaluate normalised EBITDA on two bases:

• LTM (Last Twelve Months): The trailing twelve months of normalised EBITDA — typically the most recent full financial year, updated with month-to-date management accounts to reflect the current run rate.
• NTM (Next Twelve Months): A forward projection of normalised EBITDA — relevant when the business is in a growth phase and historical earnings understate current performance.

Strong sellers present both LTM and NTM normalised EBITDA with supporting documentation — management accounts, signed contracts, and pipeline data. Buyers apply more scepticism to NTM than LTM and will typically use LTM as the primary valuation basis unless NTM upside is well-supported.

Example Normalisation Calculation

Item	Amount
Reported EBITDA	A$2,200,000
+ Owner salary above market rate	A$480,000
+ Non-recurring legal costs (patent dispute)	A$120,000
+ Personal vehicle expenses	A$45,000
+ One-off IT implementation cost	A$95,000
− Market-rate replacement of owner’s product development role	(A$180,000)
Normalised EBITDA	A$2,760,000

At a 7x EBITDA multiple: A$2.76M × 7 = A$19.3M enterprise value vs A$2.2M × 7 = A$15.4M on reported figures — a A$3.9 million difference from normalisation alone.

Preparing Your Normalised EBITDA for Sale

Business owners preparing for an M&A process should:

1. Engage their accountant and M&A advisor 12–18 months before the intended sale
2. Document every adjustment with supporting evidence — payroll records, invoices, board minutes, contracts
3. Test each adjustment against the “would a new buyer incur this cost?” question — only add back costs a buyer genuinely would not face
4. Prepare 3 years of normalised EBITDA to show trend and trajectory, not just the most recent year
5. Be conservative — buyers and their QoE advisors will scrutinise aggressive adjustments, and a disputed add-back can trigger broader due diligence concerns

Lyndon Advisory prepares normalised EBITDA schedules for sell-side clients as part of the sale preparation process, and defends those schedules through buyer due diligence.