While balance sheet numbers may appear as a true reflection of reality, during a business sale, M&A advisors often “normalize” these figures to present the best financial performance. So, what are they searching for, and what can you do now to streamline the sales process?
This article elucidates 10 crucial adjustments that can optimize your chances of selling your business at the best possible price.
Why Normalize EBITDA?
EBITDA is typically viewed as an operational cash flow indicator.
EBITDA, as an indicator, can be interpreted in various ways.
It’s often used to value companies by applying a multiple. As EBITDA can sway a business valuation, normalizing it to present the best representation is sensible. A discerning buyer will look beyond EBITDA and focus on free cash flow to value a business (considering capital expenditures, interest, taxes, etc.). Valuation is based on an EBITDA calculation, so understanding how to normalize EBITDA and present the highest possible price is a valuable skill for business owners.
TOP 10 EBITDA Adjustments
Here are 10 excellent normalization adjustments for EBITDA (in no particular order). It’s vital to make these calculations before listing your business for sale. Engaging a merger and acquisition consultant should save business owners money during the sales process.
1. Revenues or Expenses:
This adjustment pertains to a company engaging in transactions with related parties at above or below market price. For instance, if your operating company purchases supplies from another company owned by a significant shareholder at prices above market value, you would normalize EBITDA to reflect the fair market value of those supplies.
2. Income or Expenses Generated by Unnecessary Assets:
Unnecessary assets are those not required to operate the business. For example, if your business has a cottage asset supposedly used for business functions or as an employee incentive. Since the cottage isn’t needed to operate the business, expenses related to it paid by the company would be added back to normalize EBITDA.
3. Owners’ Salaries and Bonuses:
Owners’ salaries often deviate from the regular pay scale, frequently due to a bonus declared in the subsequent year if the business is owner-managed, to minimize income taxes. This bonus, and any non-standard owner salaries, must be added back to calculate recurring EBITDA.
4. Leasing of Equipment at Prices Above or Below Fair Market Value:
Many companies lease facilities from a holding company owned by a shareholder. If the rent is arbitrarily set above market value, EBITDA would be adjusted upwards by adding the arbitrary rent and subtracting the true market rent.
5. Start-up Costs:
In the case of a new business line launched during the period under review, associated start-up costs should be added back to EBITDA as they are sunk costs and won’t be incurred in the future.
6. Lawsuits, Arbitrations, Insurance Claim Recoveries, and One-Time Litigation:
Any extraordinary revenues or expenses settled during the review period would not recur, and thus, they would be deducted (in case of income) or added back (in case of an expense).
7. One-Time Business Expenses:
Expenses incurred related to non-recurring matters should be identified. For example, legal fees a company incurs to settle a dispute.
8. Repairs and Maintenance:
Often, private business owners misclassify capital expenditures as repairs to minimize taxes. A proper review that focuses on separating and adding any of these capital items to EBITDA is essential.
9. Inventory:
If your company uses equipment to provide services, it likely has an inventory of spare parts. Often, private business owners maintain a general supply of spare parts throughout the year (for example, 25,000 Euros for a small warehouse) to minimize revenue for tax purposes. If the inventory exceeds the general allowance, it would be prudent to count and value this inventory as close as possible to the time of sale. Any excess over the allowance should be added to EBITDA to reflect the true value of the deferred inventory.
10. Other Income and Expenses:
This category in the financial statement is usually packed with items that can be added to EBITDA. It’s also sometimes a “catch-all” category for expenses that can’t be coded elsewhere. Keep a close eye on these accounts and ensure anything non-recurring is added back in. For example, some companies record one-time employee bonuses or special expenses related to donations in this category. These expenses should definitely be added back to EBITDA.
The process of valuing your business for sale using the EBITDA method isn’t always black and white. Mergers and acquisitions consultants will prepare a record of the last three to five years of normalized EBITDA for the sale of your business. Nothing is stopping you from analyzing your own numbers well before deciding to sell, ensuring you secure the best deal at the right time. In the end, 5x higher EBITDA is undoubtedly more attractive!
In Summary
Valuing a company is a crucial step in the process of selling it. Several methods exist, one of which is applying a multiple to EBITDA, which can be carried out by a mergers & acquisitions expert. We’ve listed 10 possible adjustments that can be applied to EBITDA to achieve a more favorable offer, including income or expenses generated by unnecessary assets, owners’ salaries and bonuses, equipment rentals at prices above or below market value, start-up costs, supplies and recovery of insurance claims and one-time litigations, one-time professional expenses, repairs and maintenance, and inventories. Some operations are entirely legitimate and defensible and can be applied to improve EBITDA upwards.
FAQ
What services does Actoria provide?
Actoria specializes in mergers and acquisitions advisory for small and mid-sized businesses. Our services include company sales, succession planning, buy-side and sell-side mandates, business valuation, financial diagnostics, investor sourcing, negotiation support and full transaction execution until closing.
Who does Actoria work with?
We support SME owners, family-business leaders, shareholders, entrepreneurs, private investors, and corporate groups seeking to acquire or divest businesses in Europe and North Africa.
In which countries does Actoria operate?
Actoria has local teams in Switzerland, France, Belgium, Luxembourg, Morocco and Tunisia, and manages cross-border deals across Europe, Africa and the Middle East through an international buyer network.
How many potential buyers are in Actoria’s network?
Our proprietary network includes more than 6,500 qualified industrial buyers, strategic acquirers and financial investors, allowing us to match sellers with high-quality counterparties.
Does Actoria support confidential business sales?
Yes. Confidentiality is fundamental to our process. All discussions, documentation and buyer approaches are handled discreetly to protect the interests of the seller and the business.
What industries does Actoria cover?
We advise companies across multiple sectors, including industrial production, manufacturing, services, IT and digital, healthcare, logistics and distribution, construction, and specialized B2B services.
What is the typical size of businesses Actoria represents?
We primarily advise SMEs with revenues generally ranging from CHF/EUR 2 million to 100 million, depending on jurisdiction and market.
How does Actoria determine the value of a business?
We perform detailed financial and strategic analysis using multiple valuation methods, including discounted cash flows, market multiples, asset-based methods, and sector benchmarking.
How long does a business sale process take?
A standard transaction typically takes 6 to 12 months depending on market conditions, buyer interest, company complexity and diligence requirements.
Why choose Actoria as an M&A advisor?
With over 20 years of experience, a senior advisory team, a structured methodology, and an extensive network of qualified buyers, Actoria delivers independent advice, tailored execution and strong transaction results for SME owners.
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Actoria has swiftly identified the inefficiencies in our company’s processes, proposed optimizations, and implemented them effectively. Furthermore, Actoria has provided outstanding support throughout all stages of our company’s transfer to a group within our industry. This includes preparing our company, identifying potential buyer partners, and negotiating up to the point of the partner’s capital entry. Actoria delivered expert negotiation skills and secured a valuable partner for us.
We were quite anxious to find a solution, as my health was deteriorating rapidly. Actoria’s consultant played a crucial role in the successful completion of my company’s sale. Their involvement was essential in executing this delicate project, as it impacted our daily operations. This project, which was close to my heart and increasingly necessary, was made possible thanks to the decisive momentum provided by Actoria.
First, Actoria conducted a thorough assessment of our company’s strengths and weaknesses, and then suggested incorporating these insights into our management approach to enhance our company’s value. Actoria led this project alongside my entire management team, enabling the involvement of all key personnel, and swiftly implementing a solution that allowed an investor to enter our capital. This was complemented by the inclusion of some of my company’s executives and a bank.
I couldn’t be happier with the result, but I am especially pleased with my decision to work with Actoria. The success of this mission was the direct result of Actoria’s hard work and sophisticated professionalism on my business. From our first meeting through the reasonable preparation process, all phases of the transfer, legal and financial operations were managed by the Actoria team. Their skills were even more evident when the complexities of this transaction were at its peak.
Hiring Actoria made the difference to achieve my original goal and move on to my next professional challenge. Selling a company like AMR in this market has not been an easy task. Actoria has demonstrated perseverance in identifying good buyers with knowledge of my industry in order to continue the development of my business, and has provided professional advice throughout the process.
The company’s sales process was a lengthy and challenging journey. The professional support from Actoria made this endeavor much more manageable. I would like to extend special thanks to the consultants from Switzerland and France for their highly effective collaboration. Your consultants proposed creative solutions during the negotiations, which effectively overcame significant obstacles in order to finalize the agreement. Their experience, knowledge, and professionalism played a crucial role in the success of this transaction.
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