Normalized EBITDA: the number that sets your price

Normalized EBITDA is your company's earnings, corrected to show what it would earn under a new owner. It's often the number a buyer builds their offer on. Every well-documented adjustment protects it; every questionable one casts doubt on all the others and, in the end, on the price.

From accounting profit to normalized EBITDA

Start with the term. EBITDA is earnings before interest, taxes, depreciation and amortization. It measures what the business produces from its operations, before financing and tax choices, which will change with the new owner anyway.

But your financial statements tell the story of a business run by you, with your choices. You may pay yourself more or less than the market rate. You may rent your building from your own real estate company. You may have paid for a big lawsuit last year. None of that will repeat the same way for the buyer.

Normalization corrects those differences. You start from accounting EBITDA, then make two kinds of adjustments:

• Add back what won't recur: personal expenses, one-time costs, an owner salary above market, rent above market.
• Deduct what will really cost the new owner: a manager's salary if you pay yourself little, or mostly in dividends, and a family member working unpaid.

Deferred maintenance is a separate case. It affects future capital spending more than EBITDA, and buyers will often try to take it straight off the price. Better to know about it before they do.

The result is the EBITDA the buyer can expect to see next year. When the price is discussed as a multiple, that's the number it's based on, not the one in your financial statements.

The math, line by line, in Shawinigan

A made-up case to watch the numbers move: a home renovation centre in Shawinigan, seven million dollars in sales, 30 employees. The owner, 62, runs everything. His financial statements show EBITDA of $700,000. Here's what his accountant flags while preparing the sale:

Adjustment	Why	Amount
Owner salary	He pays himself $250,000; a competent general manager would cost $160,000, based on salary data his accountant pulled	+$90,000
Rent	The building belongs to his real estate company, which charges $30,000 above market; a new lease at market rent will be signed	+$30,000
Personal expenses	His spouse's vehicle, mixed-purpose trips, all documented	+$25,000
Settled lawsuit	Legal fees from a dispute with a former supplier, settled for good	+$40,000
Unpaid work	His spouse keeps the books for free; the new owner will have to pay someone	−$55,000
Normalized EBITDA	$700,000 + $185,000 − $55,000	$830,000

All these numbers are illustrative. What matters is the mechanism: if the buyer prices the business as a multiple of normalized EBITDA, the $130,000 gap gets multiplied too. So every solid adjustment weighs several times its amount in the price. So does every adjustment the buyer rejects.

Look at the rent line: it only holds if the new lease is actually signed. Otherwise the buyer pays today's rent and throws out the adjustment.

Adjustments that hold up, and those that don't

During due diligence, the buyer's accountant will go through every line. They'll readily accept what is:

• Documented: invoices, contracts, statements. An adjustment without supporting documents is worth almost nothing.
• Truly non-recurring: a settled lawsuit, a one-time move. Not an "exceptional expense" that shows up every year.
• Benchmarked to the market: for a salary or rent, an outside reference beats your own estimate.

They'll almost always challenge:

• "upcoming" sales or unsigned contracts presented as done;
• savings you could have made but didn't;
• personal expenses that can't be told apart from business ones.

And they'll add their own adjustments, downward this time. The most common: the cost of replacing you, if the business still depends on you. That's where the work of the earlier steps shows up in the number: a business that runs without you has fewer hidden costs to deduct.

Normalized EBITDA and the multiple

The price of a small business is often discussed as a multiple of normalized EBITDA. That multiple isn't a published rule: it depends on the industry, size, growth, perceived risk and the buyer. We don't give a figure here, because a general number would mislead. For a range specific to your business, see what your business is worth and work with a valuator.

Remember the mechanism: the price depends on two numbers. Normalized EBITDA, which you can document. And the multiple, which goes up when risk goes down, especially when the business no longer depends on you. You have influence over both.

When to start

As early as possible, ideally two or three years before the sale. For three reasons. First, some adjustments are better settled by changing reality than by explaining it: taking personal expenses out of the business, paying the person who works without a salary, signing a lease at market rent. Second, a buyer trusts clean results over several years more than a long list of corrections. Third, you'll learn early which adjustments your accountant considers solid, and which ones are likely to be rejected.

Your normalization template

This week, open a spreadsheet with these columns and fill in a line for anything you suspect is "not how another owner would do it." Bring it to your accountant, who will sort out what holds up.

Adjustment	Year 1	Year 2	Year 3	Justification	Proof in the room	Outside reference
e.g. owner salary				Why it won't recur, or why it will cost money	Document name in the data room	For salary or rent, where the market price comes from

Do it over three years, not one. A buyer distrusts an adjustment that only appears in the year of the sale. And if the rent paid to your real estate company needs correcting, sign the new lease before the sale: the adjustment then becomes a fact.

For the tax impact of these choices, such as how your pay is structured, talk to your tax advisor. The rules change and depend on your situation.

Do it with a pro

Alone, owners tend to defend too many adjustments or miss good ones. With us and our regional partner, the normalization table is built with your accountant, every adjustment is documented in the data room, and the buyer finds a number they can check without disputing it. Our fees are almost entirely tied to results and mostly paid after the sale, so starting early costs very little upfront.

Sell my business in Quebec