Adjusted EBITDA is a normalized profitability metric that starts with EBITDA and adds back expenses management argues are one-time, non-cash, or unrelated to core operations.

How it works

Buyers build a quality-of-earnings report. Legal fees for a single acquisition might add back; recurring “integration” costs every year might not. Stock-based compensation treatment varies—some strategics ignore it; some PE firms cap add-backs. The result drives leverage capacity and purchase price multiples.

Venture-stage companies rarely lead with adjusted EBITDA until growth slows and cash flow matters. Late-stage SaaS approaching PE or public comparables may introduce adjusted EBITDA alongside ARR to show path to sustainable margins.

Why it matters

• Founders: Document add-backs with invoices and narratives before diligence. Aggressive adjustments erode trust and retrade price.
• Investors: Compare reported adjustments across portfolio companies; pattern of permanent “one-time” costs signals weak controls.
• GPs: LBO models hinge on exit EBITDA—optimistic adjustments at entry compound at exit assumptions.

Common mistake

Adding back all marketing spend as “growth investment” while claiming the business is profitable on adjusted EBITDA. Buyers haircut obvious gaming.

Related ideas

EBITDA, quality of earnings, enterprise value multiples, and add-on acquisition synergy models.