A business reporting £1 million of EBITDA at a 6x multiple has an indicative enterprise value of £6 million. If legitimate adjustments increase sustainable EBITDA to £1.25 million, the same multiple implies £7.5 million of enterprise value.
Nothing has happened to the multiple. The true underlying earnings have simply been presented properly. That £250,000 EBITDA adjustment has potentially created £1.5 million of additional enterprise value, which is why this work should begin well before a sale process.
What is an EBITDA add-back?
An EBITDA add-back is normally an expense in the historical profit and loss account that is non-recurring, discretionary, owner-specific or otherwise not representative of the normal cost base under new ownership.
The purpose is not to create artificial profit. It is to establish a sensible view of sustainable underlying earnings. A genuine add-back has a reasonable, supportable explanation for why the business will not incur that cost going forward. Buyers understand the difference between that and a cost a seller would simply prefer them to ignore.
What is adjusted EBITDA?
Adjusted EBITDA is EBITDA after appropriate normalisation adjustments for unusual, non-recurring, discretionary or owner-specific income and expenditure. It is widely used in mergers and acquisitions because reported accounts do not always show how a privately owned company would perform under normalised ownership.
It is not a universally standardised accounting measure. Advisers, sellers and buyers can reach different conclusions about individual adjustments, which is exactly why evidence, presentation and judgement matter.
Why add-backs can materially affect agency value
In many agency transactions, enterprise value is derived partly or primarily from a multiple of maintainable EBITDA:
Enterprise value = maintainable EBITDA × valuation multiple
At a 7x multiple, every £10,000 of accepted additional EBITDA is theoretically worth £70,000 of enterprise value. At 8x, it becomes £80,000. That does not make every claimed adjustment valid, but it shows why owners need to understand their numbers in detail before entering a transaction.
What makes a strong add-back?
- The expenditure actually occurred and is identifiable in the accounts or general ledger.
- There is documentary evidence supporting the cost and explanation.
- It is genuinely exceptional, discretionary or owner-specific.
- There is a clear reason why it will cease.
- The business does not need an equivalent cost to maintain its current revenue.
- It has not simply been labelled one-off to create a more attractive valuation.
A buyer should be able to follow the logic from the statutory accounts, through the underlying transaction and into the adjusted EBITDA calculation. If that chain breaks, the adjustment becomes harder to defend.
Not every adjustment increases EBITDA
Normalisation works in both directions. A founder who performs the roles of CEO, chief salesperson and finance director while taking little salary can create a negative adjustment because a buyer may need to add management cost after acquisition. Similarly, below-market rent paid to a founder may need to be normalised upwards. Adjusted EBITDA is about sustainable profitability, not simply making the seller's number larger.
The three types of add-back
Potential adjustments can be strong, arguable or aggressive. The category signals the quality of the argument, not a guarantee of buyer acceptance.
Strong add-backs
Relatively straightforward to explain and evidence.
- Sale-related professional fees
- A completed legal dispute
- Genuine personal expenses
- Redundancy for roles that have disappeared
- Duplicate rent during an office move
- Founder pay above credible replacement cost
Arguable or negotiable adjustments
Require more judgement, evidence and a fact-specific explanation.
- Strategy consultants
- Exceptional recruitment
- Temporary management
- Technology implementation
- Rebranding
- Particular freelance costs
Aggressive adjustments
Costs the company would normally need to continue incurring to operate at its current level.
- Normal payroll
- Normal freelancers
- Recurring software
- Regular marketing
- Sales commission
- Routine professional fees
Trying to present ordinary operational costs as adjustments can damage credibility. Some arguable items will be accepted, some partly accepted and others rejected, depending on the circumstances and the evidence.
100+ potential EBITDA add-backs and normalisation adjustments for agencies
The list below is deliberately extensive. It is not a suggestion that every item can automatically be added back. The correct treatment depends on the facts, accounting treatment, evidence, transaction structure and whether the cost genuinely continues after completion.
Founder, owner and shareholder remuneration
- Founder salary above market replacement cost
- Founder bonus above a normal replacement package
- Discretionary shareholder bonuses
- Excess employer pension contributions
- Founder private medical cover
- Founder life and personal insurance
- Founder company car and personal fuel
- Personal travel, hotels and flights
- Club memberships and personal subscriptions
- Personal tax, legal and financial advice
- Personal PR and profile-building costs
- Personal mobile, broadband and equipment
The founder's entire compensation is not automatically an add-back. An appropriate replacement cost normally remains.
Family and connected-party costs
- Salary paid to a non-working spouse
- Salary paid to other non-working family members
- Excess family-member remuneration
- Family benefits, vehicles and healthcare
- Connected-person pension contributions
- Payments to family-owned suppliers above market rate
- Related-party management and administration charges
- Non-commercial connected-party arrangements
Normalisation is the principle. A family member who performs a real role cannot simply disappear from the cost base.
Transaction and business-sale costs
- Corporate finance and M&A adviser fees
- Sale preparation and transaction legal costs
- Tax structuring and vendor due diligence
- Quality of Earnings and data room costs
- Transaction accounting and financial modelling
- Deal-related consulting and insurance advice
- Management presentation preparation
- Transaction and completion bonuses
- Success fees
- Costs of an aborted or failed sale process
The cost must be caused by the transaction, not an ordinary professional cost relabelled for sale.
Legal and professional costs
- One-off litigation
- Exceptional legal disputes
- Employment tribunal costs
- Settlement agreements
- Historic shareholder disputes
- Intellectual property disputes
- Regulatory investigations
- One-off tax disputes
- Historic accounting remediation
- Forensic accounting or exceptional audit work
Routine legal, accounting and professional advice is a continuing cost of business.
Restructuring and people costs
- Redundancy and severance payments
- Restructuring advisers
- Employment lawyers relating to restructuring
- Outplacement costs
- Employee settlements
- Duplicate payroll during a handover
- Temporary duplication of senior leadership
- Costs of closing a department or office
- One-off organisational redesign
- Exceptional retention payments
Buyers will ask whether the underlying people requirement has genuinely disappeared.
Recruitment costs
- Exceptional executive search
- Recruitment after a one-off restructuring
- Replacing an entire leadership team
- Exceptional recruitment campaigns
- Temporary duplication around leadership appointments
- Recruitment for a discontinued expansion project
Normal recruitment is usually an ordinary cost of running a people business.
Temporary and interim management
- Interim CFO
- Interim finance director
- Temporary COO
- Temporary HR director
- Interim managing director
- Temporary transformation director
- Temporary technology leadership
- Emergency management cover
Normalise to the cost of the permanent resource the business actually requires, rather than removing the entire interim cost.
Consultancy and advisory costs
- One-off strategy consultancy
- Organisational and leadership consultancy
- Shareholder advisory costs
- Business-sale preparation
- Brand architecture projects
- Technology transformation consultants
- Pricing and remuneration reviews
- Corporate structure reviews
- Exceptional governance work
- Post-acquisition integration consultants
Describe precisely what the consultant did, why it was exceptional, when it finished and why it will not recur.
Property and office costs
- Office relocation costs
- Duplicate rent
- Office closure
- Dilapidations
- Relocation advisers and removal costs
- Temporary premises and storage
- One-off refurbishment
- Costs of consolidating offices
- Surplus property costs
- Excess related-party rent
Related-party rent normally needs normalising to market level, which can work in either direction.
Technology and systems
- CRM and ERP implementation
- Finance or HR system migration
- Major data migration
- Legacy-system replacement
- Cybersecurity remediation
- Historic security incident response
- Exceptional systems integration
- Cloud migration
- One-off infrastructure rebuild
- Temporary dual-running of systems
Ongoing licences, hosting, cybersecurity and technology support are generally operating costs.
Marketing, brand and business development
- Major corporate rebrand
- Exceptional website redevelopment
- One-off brand consultancy
- Corporate identity redevelopment
- Exceptional PR campaign
- One-off research programme
- Large thought-leadership project
- Exceptional sponsorship
- One-off launch event
- Major market-entry campaign
Agencies need to market themselves, build reputation and win work. These adjustments need particularly strong justification.
New business and pitch costs
- External pitch consultants
- Exceptional pitch production
- Large speculative pitch expenses
- International pitch travel
- Temporary pitch teams
- External research for a specific pitch
Buyers often challenge these costs because pitching is part of operating an agency.
Freelancers and contractors
- Cover for long-term sickness
- Cover for a short-term vacancy
- Costs tied to a completed project
- Contractors during a one-off restructuring
- Duplicate freelancers during a transition
- Costs connected to a discontinued service
- Exceptional spend linked to a departed client
You cannot retain the revenue and remove the people cost required to service it.
Acquisitions and integrations
- Acquisition advisory and legal costs
- Acquisition due diligence
- Integration consultants
- Systems and brand integration
- Office consolidation after acquisition
- Duplicate leadership and systems
- Temporary integration teams
- Acquisition-related restructuring
- Abortive acquisition costs
Buyers may examine whether acquisitions are part of the company's normal strategy.
Discontinued operations and failed initiatives
- Closed business units
- Discontinued service lines
- Failed product launches
- Abandoned technology projects
- Failed overseas expansion
- Closed overseas offices
- Abandoned market-entry programmes
- Failed joint ventures
- Closed subsidiaries
- One-off closure expenses
Consider revenue and expenditure together. Removing costs while retaining discontinued revenue can be misleading.
Exceptional losses
- Exceptional bad debt
- Client insolvency
- Fraud
- Employee theft
- Cybercrime losses
- Exceptional uninsured losses
- Natural-disaster costs
- Fire damage
- One-off insurance deductibles
- Exceptional settlement costs
A cost that recurs each year is unlikely to remain exceptional simply because it has a different description.
Financing and corporate costs
- Exceptional refinancing fees
- Corporate restructuring
- Historic capital-raising advice
- Shareholder structure work
- Group restructuring
- Entity rationalisation
- Exceptional governance projects
- Historic corporate reorganisations
Accounting treatment matters, so each item needs individual review.
Group and related-company charges
- Historic management charges
- Parent-company charges that disappear
- Costs allocated from another shareholder-owned company
- Excess group service charges
- Shareholder administration charges
- Non-commercial related-party arrangements
- Shared-service arrangements
Understand the services behind the charge. Finance, HR and IT support may still need to be provided after completion.
Charitable and discretionary expenditure
- Shareholder-selected charitable donations
- Personal sponsorships
- Founder-selected community projects
- Discretionary donations
- Personal philanthropic expenditure through the business
If the expenditure is important to the employer brand or commercial positioning, stopping it may affect the business.
Founder replacement cost and dependency
Founder replacement cost is one of the most misunderstood areas. If a founder receives £300,000 in salary and bonus, while a credible managing director replacement would cost £180,000 including employment costs, the potential adjustment is approximately £120,000, not £300,000.
Even that needs thought. If the founder generates substantial new business, runs major client relationships, leads creative output and manages the leadership team, one replacement person may not be enough. A buyer could reasonably conclude that two roles are required.
What usually cannot be added back to EBITDA?
The test is not whether a cost could technically be stopped. The better question is whether a sensible new owner could stop it while maintaining the earnings they are being asked to value.
- Normal employee and management salaries
- Normal freelance and contractor expenditure
- Sales commissions and regular bonuses
- Normal recruitment and routine marketing
- Routine pitch costs, travel and client entertainment
- Recurring accounting, legal and professional fees
- Standard insurance, office rent and IT support
- Recurring software, CRM subscriptions and cloud hosting
- Cybersecurity, regular training and staff benefits
- Any expenditure required to maintain current revenue
Build an evidence file, not a wish list
For each material adjustment, retain general ledger entries, supplier invoices, contracts and engagement letters, payroll and employment records, redundancy documentation, legal invoices, relevant board minutes, project documents, replacement-cost benchmarking and management explanations.
- Did the cost genuinely occur and reconcile to the accounts?
- Why was it incurred, and is that explanation specific?
- Is it genuinely exceptional or owner-specific, rather than inconvenient?
- Has the expenditure stopped? If not, why will it stop?
- Does somebody still need to perform the activity? If so, what is the replacement cost?
- Would removing the expenditure affect the revenue being valued?
- Can the argument be evidenced from the ledger through to the adjusted EBITDA bridge?
How buyers challenge EBITDA add-backs
An adjusted EBITDA schedule is not merely an accounting exercise. It is an argument about the sustainable economics of the business.
Was this genuinely a one-off cost, or has it occurred before?
Will the expenditure recur next year?
Was the cost necessary to produce the revenue?
Who performs this work after completion?
Has the alleged saving already been achieved?
Is the adjustment documented and auditable?
Is another cost missing from the P&L that should replace it?
Would a third-party owner reasonably incur the expense?
The difference between finding an add-back and getting it accepted
Finding an expense and calling it exceptional is easy. Getting an experienced buyer and their financial due diligence team to accept it is different. The objective is the highest credible and defensible maintainable EBITDA, not the highest possible number. An unrealistic schedule can weaken confidence in the wider transaction.
Quality of Earnings and the multiple
In larger transactions, a Quality of Earnings review may examine recurring revenue, client concentration, gross margins, employee and freelancer costs, accruals, revenue recognition, working capital, founder expenditure and each significant adjustment. A clean P&L, reliable management accounts and a credible bridge make a business easier to diligence. A large schedule of aggressive adjustments can create the opposite impression.
Prepare the EBITDA bridge before you go to market
Review several years of accounts, not just the most recent period. Historical patterns reveal costs that genuinely occurred once, costs repeatedly described as one-off, founder-related expenditure, consultancy patterns, property anomalies and investments that have now ceased.
Illustrative EBITDA bridge
- Reported EBITDA
- £1,000,000
- Excess founder remuneration
- + £100,000
- One-off restructuring
- + £75,000
- Exceptional legal costs
- + £30,000
- Non-recurring consultancy
- + £25,000
- Owner-specific expenditure
- + £20,000
- Adjusted EBITDA
- £1,250,000
Starting early gives owners time to remove personal expenditure, put related-party arrangements on commercial terms, document unusual costs, separate exceptional expenditure in management accounts, reduce founder dependency and build an organised evidence file. If the first serious review happens during buyer due diligence, the seller is reacting rather than controlling the conversation.
Bluhalo perspective
Maximising value is not about manipulating the accounts
Agencies are unusual businesses: value rests in people, clients, intellectual capital and future earnings. The role of a specialist adviser is not to manufacture EBITDA, but to understand what the business needs to sustain revenue, find legitimate adjustments that may be buried in the accounts and anticipate the buyer's argument before it is made.
Talk to an M&A adviserFrequently asked questions about agency EBITDA add-backs
Every adjustment turns on the facts, evidence and transaction context. These answers set out the principles buyers commonly apply.
About this guide
Prepared and reviewed by Bluhalo's M&A advisory team
Bluhalo works exclusively with agency founders. This guidance draws on benchmarks from more than 2,500 agencies and experience across 55+ completed M&A transactions.
This guide is general information for agency founders. The accounting, tax and legal treatment of any adjustment depends on its specific facts and should be assessed with appropriate professional advisers.