Adjusted EBITDA

While EBITDA strips out interest, taxes, and non-cash depreciation and amortization, Adjusted EBITDA goes further by removing items that distort the picture of ongoing operational performance. A company undergoing a major restructuring might report depressed EBITDA due to one-time severance and facility closure costs, but its Adjusted EBITDA would add those back to show what normalized profitability looks like. The distinction matters enormously in deal contexts because buyers and sellers frequently negotiate over which adjustments are legitimate. Adjusted EBITDA is the number that actually appears in purchase agreements and bank lending documents.

Stock-based compensation is one of the most debated add-backs — sellers argue it's non-cash, while some buyers counter that it represents real economic cost that must be replaced with cash compensation post-acquisition. Restructuring charges, litigation settlements, and transaction-related fees are more widely accepted add-backs because they are clearly non-recurring. Run-rate adjustments for recently completed initiatives (e.g., a new contract just signed, a cost-cutting program just implemented) are among the most aggressive and contentious adjustments. The quality of Adjusted EBITDA adjustments directly impacts the EV/EBITDA multiple a buyer is willing to pay.

In virtually every M&A transaction, the purchase price is expressed as a multiple of Adjusted EBITDA, making the definition of adjustments a critical negotiation point. Sellers have strong incentives to maximize Adjusted EBITDA by including aggressive add-backs, while buyers push back to keep the number conservative. Quality of Earnings (QoE) reports — prepared by accounting firms during due diligence — scrutinize each adjustment to determine if it's truly non-recurring and properly calculated. A $5M add-back at a 10x multiple swings the purchase price by $50M, so these negotiations are high-stakes and detailed.

Interviewers love asking about Adjusted EBITDA because it tests whether you understand the real-world mechanics of deal pricing versus textbook definitions. Strong candidates can name 4-5 common add-backs and explain why each is (or isn't) appropriate. Red flags to mention: if a company's Adjusted EBITDA is consistently 30%+ higher than reported EBITDA, the adjustments may be overly aggressive. Another red flag is when 'one-time' charges appear every single year — they're not really one-time. Knowing these nuances separates strong candidates from those who just memorize formulas.