Definition

Adjusted EBITDA

Adjusted EBITDA takes earnings before interest, taxes, depreciation, and amortization, then strips out items that do not reflect the ongoing business, to estimate normalized operating profit. Typical adjustments remove one-time legal settlements, above-market owner salaries, discontinued product lines, and other costs a new owner would not carry. In a transaction, this figure often anchors the valuation, since deals are frequently priced as a multiple of it. The danger lies in the adjustments themselves: sellers tend to be generous with add-backs, so buyers and their advisers scrutinize each one. A defensible Adjusted EBITDA rests on adjustments a reasonable third party would accept.