EBITDA Adjustments: What Counts, What Does Not and What Investors Push Back On

The Most Commonly Abused Metric in Private Company Finance

There is no accounting standard that governs adjusted EBITDA. Unlike statutory profit, which follows IFRS or UK GAAP with defined rules, adjusted EBITDA is a non-GAAP metric whose definition can vary between companies, between transactions, and between years within the same company. This flexibility is both the metric's strength (it can, in principle, represent true underlying earnings better than statutory profit) and its weakness (it can be constructed to tell an almost unlimited range of stories).

In the private company M&A and venture fundraising context, the adjusted EBITDA presented in an investment memorandum or a fundraising pack is typically the number on which the valuation multiple is applied. A business valued at 10x adjusted EBITDA is worth £10m if adjusted EBITDA is £1m and £12m if adjusted EBITDA is £1.2m. The economic incentive to maximise the adjusted figure is obvious. The equally obvious problem is that investors and buyers have seen every adjustment many times before, and aggressive add-backs erode trust and extend due diligence timelines.

This article sets out a clear framework for what adjustments are defensible, what typically gets challenged, and how to present an adjustments bridge that survives scrutiny.

What Adjustments Are Genuinely Defensible

A defensible adjusted EBITDA adjustment shares three characteristics: it relates to a cost that is genuinely non-recurring; there is contemporaneous documentary evidence of the non-recurring nature (board minutes, project plans, contracts with defined end dates); and any informed, independent observer would agree it is appropriate to exclude the item when assessing the underlying earnings power of the business.

• One-off restructuring costs with a board-approved plan: Where the board has formally approved a restructuring programme with a defined scope, budget, and timeline, and the resulting costs are expected to conclude within 12 to 18 months, the restructuring charge can reasonably be excluded from adjusted EBITDA. The evidence required is the board minute approving the plan and the budget. The adjustment should be limited to the period and costs within the approved plan.
• M&A transaction fees that are truly one-off: Legal and advisory fees incurred in connection with a specific acquisition or disposal are by definition non-recurring in relation to that transaction. These are a standard and widely accepted add-back, provided the company is not in a state of continuous M&A activity (in which case transaction fees are, in effect, recurring).
• Share-based compensation (with increasing scrutiny): SBC is a non-cash charge and has historically been a standard add-back to EBITDA. However, investors at Series B and above are increasingly treating SBC as a real economic cost, arguing that it represents compensation paid to employees in a form other than cash and that removing it overstates what is available to equity holders. The defensibility of this add-back is declining, particularly for companies where SBC is large relative to cash compensation.
• One-time legal costs with defined scope: Legal costs incurred in connection with a specific, non-recurring dispute or regulatory proceeding (not ongoing regulatory compliance costs) can be adjusted out where the matter is clearly defined and expected to conclude.
• Pre-revenue development costs time-limited to a specific project: Where a company has expensed development costs under IFRS 15 or IAS 38 on a specific product or system with a defined delivery timeline, and those costs will not recur once the product is delivered, an adjustment may be defensible. This requires careful documentation of the scope and expected completion date.

What Investors Will Challenge

The following items are the most frequent sources of pushback in due diligence. Each of them has been presented as a legitimate adjustment by many sellers and rejected by many investors. The rejection is almost always based on the same underlying analysis: the item is, on examination, recurring.

Presenting Adjustments Clearly: The Bridge Format

The adjustments bridge (also called a walk or a reconciliation) is the standard format for presenting the journey from statutory P&L EBITDA to adjusted EBITDA. Each line must be explained, supported with evidence, and presented consistently year on year. A bridge that changes its adjustment categories between years (adding new items and dropping others without explanation) will attract immediate questions.

The bridge above illustrates several important principles: the statutory starting point is clearly stated and cross-referenced to audited accounts; each add-back is accompanied by the specific evidence supporting it; a potentially controversial add-back (SBC) is flagged with a note acknowledging investor expectations; and a reduction (above-market founder salary) is included to show even-handedness. A bridge that only adds back items and never reduces will be viewed with suspicion.

What the FRC and ICAEW Say About Non-GAAP Metrics

The Financial Reporting Council (FRC) and the ICAEW have both published guidance on the use of non-GAAP metrics in investor communications. While neither sets binding rules for private companies (the binding rules apply to listed companies under the FCA's DTR), the guidance sets out principles that sophisticated investors expect to see applied.

The FRC Reporting Lab's work on non-GAAP measures identifies four principles: prominence (non-GAAP metrics should not be given greater prominence than statutory measures); consistency (the same adjustments should be applied in each period, or changes should be explained); reconciliation (a clear bridge from statutory measures should always be provided); and balance (the adjustments should remove the obscuring effect of genuinely non-recurring items, not systematically remove all costs that reduce the metric).

The ICAEW's guidance on adjusted metrics in private company contexts adds a fifth principle that is directly relevant to fundraising and M&A: the adjustments must be supportable by contemporaneous evidence, not reconstructed after the fact to achieve a desired outcome. A company that assembles its adjusted EBITDA bridge during due diligence by reviewing its own P&L and characterising items as one-off will be far less credible than one that has been tracking adjustments consistently in its monthly management accounts throughout the year.

Key Takeaways

• Adjusted EBITDA is the primary valuation metric in private company transactions and the most commonly abused non-GAAP measure. Investors and buyers know this.
• Defensible adjustments share three characteristics: genuinely non-recurring; supported by contemporaneous documentary evidence; and would be accepted by an informed independent observer.
• The adjustments most commonly challenged in due diligence are recurring restructuring costs presented as one-off, unrealised synergies, recurring marketing costs characterised as investment phase, and founder salary adjustments without rigorous benchmarking.
• Share-based compensation remains an accepted add-back but investor scrutiny is increasing, particularly at Series B and above where SBC can be a significant percentage of compensation.
• The adjustments bridge should start with statutory EBITDA, include both addbacks and reductions, and provide specific evidence for each item. A bridge with only addbacks will attract scrutiny.
• The FRC and ICAEW's guidance emphasises prominence, consistency, reconciliation, and balance. These principles apply in spirit to private company investor communications even where the rules do not bind.
• Track your adjustments bridge in monthly management accounts throughout the year. Retrospectively constructed bridges are immediately identifiable and undermine credibility.