How normalized EBITDA reflects your company's actual performance
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is often used to assess a company's financial performance. But in some cases, EBITDA does not provide a complete and accurate picture of how a company is really performing. Therefore, adjusted EBITDA (also known as normalized EBITDA) is often chosen to provide a more realistic understanding of actual business performance.
What is normalized EBITDA?
Normalized EBITDA takes into account non-recurring, non-operational or unusual costs and revenues that affect earnings. These include legal fees, bonuses to departing executives or proceeds from the sale of assets. Eliminating these factors provides a clearer picture of the company's core performance. The goal is to normalize financial results so that they can be better compared to other periods or companies.
When is normalized EBITDA relevant?
Normalized EBITDA is especially relevant during acquisition processes. Buyers like to know what the expected profitability of a company is, under normal circumstances. This ensures that incidental events do not cloud the picture. It helps to better capture the consistency and sustainability of earnings. This leads to a fair valuation of the business.
For example, suppose a company faced a legal issue in a given year that resulted in additional costs. This creates a distorted picture of operating profitability. In that case, it is wise to normalize the costs associated with the legal issue.
Benefits of custom EBITDA for businesses
Using custom EBITDA offers a range of benefits to both sellers and buyers:
- Reliable comparison: Normalized EBITDA makes it possible to fairly compare a company's performance with that of competitors or industry peers. Moreover, it is done without being influenced by incidental factors.
- Clearer negotiating position: For salespeople, it is a powerful tool to create a stronger position during negotiations because it provides a more realistic picture of actual performance.
- Transparency and insight: For buyers, it provides transparency and insight into actual operational performance, which is essential in determining a fair acquisition price.
How Florijnz helps with normalizations
We understand how important it is to present the right financial numbers in an acquisition or merger. Our advisors help identify relevant normalizations so that you have a clear and reliable picture of company performance. In this way, we ensure that your company is presented correctly to potential buyers, which is crucial to a successful transaction.
Want to know more about applying normalizations and their effect on the value of your business? Contact us for a free consultation!
