01What maintainable EBITDA means
EBITDA is earnings before interest, tax, depreciation and amortisation. Maintainable EBITDA is the level of EBITDA a purchaser could reasonably expect the business to keep generating under new ownership. It is the base to which many valuation multiples are applied, so small adjustments can have a large effect on value.
02Common normalisation adjustments
Reported EBITDA is adjusted for items that would not continue, or that do not reflect commercial terms:
- One-off costs, such as a legal dispute, a relocation or an unusual bad debt
- Owners' remuneration that is above or below the market rate for their role
- Personal expenses run through the business
- Rent paid to owners at more or less than a market rate
- Income or costs from activities that will not transfer with the business
- The full-year effect of recent changes, such as a new contract or a closed site
03Testing the adjustments
Buyers accept adjustments that are clearly one-off and well evidenced. They challenge adjustments that look like recurring costs presented as exceptional, or that rely on future savings not yet achieved. A credible valuation shows each adjustment, the evidence for it and the effect of excluding the contentious ones.
04Which period?
Maintainable earnings may be based on the latest year, an average of several years, a weighted average or the current year's forecast. The choice depends on the trend: averaging a business in steady growth can understate value, while relying on a single exceptional year can overstate it.
05Limitations
EBITDA ignores capital expenditure and changes in working capital, both of which consume cash. For capital-intensive businesses, a measure after depreciation or a cash-flow-based approach may be more appropriate.
This guide is general information, not advice on any particular situation. The correct approach to a valuation depends on its purpose, the basis of value and the facts.
