In every M&A transaction, the buyer and seller agree on a number called normalised EBITDA. This is the basis for the valuation. It is almost never the same as the EBITDA in your management accounts. Sometimes it is higher. Sometimes it is lower. The difference between understanding and not understanding this adjustment is often worth more than the fee you will pay your M&A advisor.

What normalisation is trying to do

The purpose of EBITDA normalisation is to arrive at a number that represents the maintainable earnings power of the business under new ownership. This excludes one-off items, non-recurring expenses, and owner-specific costs that will not continue post-sale. It also includes adjustments that reduce earnings — costs that were suppressed under the previous owner but will be incurred by a new one.

The key word is maintainable. Not historical. Not optimistic. Not pessimistic. The earnings a rational buyer can expect to receive, reliably, under normal operating conditions.

The owner salary problem

This is where most normalisations go wrong. The owner draws a salary of €450,000 per year. The business has €1M of reported EBITDA. The owner argues: "I should add back €450,000 because my salary is above market." The buyer responds: "We agree. But we will replace you with a CEO at €220,000, a COO at €180,000, and a CFO at €150,000. So we add back €450,000 and deduct €550,000. Net effect: minus €100,000 to normalised EBITDA."

Both sides are arithmetically correct. The disagreement is about what the business actually needs to operate without the founder. This is a question of substance, not accounting, and it is the single most important pre-sale question to answer honestly.

The deductions sellers miss

Most sellers focus on add-backs — items that increase normalised EBITDA. They forget the deductions: costs that are currently suppressed but will be incurred under new ownership.

The most common suppressed costs: below-market rent (if the owner owns the property and charges the business nothing or below market), unmaintained capex (if the business has underinvested in equipment or systems that a buyer will need to refresh), below-market salaries to loyal employees (who will leave or demand market rates post-acquisition), and compliance gaps (GDPR, employment law, health and safety) that cost nothing until they cost everything.

A sophisticated buyer will find every one of these. If you find them first and disclose them properly, you control the narrative. If the buyer finds them in due diligence, they become negotiating chips — and they will be used.

Why your accountant gets it wrong

Your accountant understands tax and statutory reporting. They are not — unless they have specific M&A transaction experience — equipped to construct a normalised EBITDA bridge that will survive buyer scrutiny. The adjustments that matter in M&A are not the same as the adjustments that matter in tax planning.

The normalised EBITDA bridge should be prepared by someone who has sat on the buy side of due diligence and knows exactly what a sophisticated acquirer will challenge. That person is not your annual audit accountant. It is a transaction services specialist, or a sell-side advisor with a strong financial due diligence track record.