In most private company transactions the price is expressed as a multiple of EBITDA. That makes every EBITDA adjustment a price negotiation in disguise: at an 8x multiple, an adjustment of ₹50 lakh changes value by ₹4 crore. Sellers therefore present "adjusted EBITDA" with add-backs, and buyers look for items that should reduce it. The role of due diligence is to arrive at a normalised figure that both sides can defend.
This article sets out the main categories of EBITDA adjustments, the tests used to accept or reject them, the effect of Ind AS 116 on EBITDA, and the difference between normalised, pro forma and run-rate EBITDA, with a worked bridge. It complements the separate discussion of quality of earnings, which covers the diagnostic tests behind these adjustments.
Key points at a glance
- Normalised EBITDA aims to show recurring earnings of the business as it will operate after the transaction.
- Adjustments fall into five groups: non-recurring items, promoter and related party terms, provisioning and cut-off, accounting policy changes, and pro forma changes.
- Each adjustment should be evidenced, recurring in its effect and consistent across all years presented.
- Under Ind AS 116, lease rentals move below EBITDA, so EBITDA on an Ind AS basis is not comparable with EBITDA after rent.
- Pro forma and run-rate adjustments rely on future events and are usually the most contested.
What is EBITDA normalisation?
EBITDA normalisation is the process of adjusting reported earnings before interest, tax, depreciation and amortisation to remove items that do not reflect the ongoing operations of the business and to reflect the cost structure a buyer will actually face. The result is used as the base for valuation multiples, lender covenants and, often, earn-out calculations.
The five categories of EBITDA adjustments
1. Non-recurring and exceptional items
One-time legal and professional costs (including costs of the transaction itself), settlements, exceptional repairs after a fire or flood, gains on sale of assets and insurance claims. The test is whether the item has occurred before and whether it is likely to occur again. Items described as "one-time" that appear every year are recurring in substance.
2. Promoter and related party adjustments
Promoter remuneration above or below the market cost of a professional replacement, personal expenses routed through the business, and rent, purchases or services from group entities at non-market prices. The adjustment replaces the actual cost with the cost the business will bear after the deal.
3. Provisioning and cut-off
Under-provision of bonus, warranty, gratuity or bad debts, reversals of old provisions credited to income, and expenses of one year booked in the next. Where provisions are released into EBITDA, the credit is removed; where they are understated, a normal charge is added.
4. Accounting policy changes
Changes in capitalisation of development or repair costs, inventory valuation, or revenue recognition that increase profit in one year relative to others. The aim is to present all years on a consistent basis.
5. Pro forma and run-rate adjustments
Adjustments for events that have happened or are planned but are not fully reflected in historical results: a new contract won late in the year, a closed loss-making unit, cost savings from a restructuring. These require the most evidence because they reflect expectations rather than history.
How Ind AS 116 affects EBITDA
Under Ind AS 116, Leases, a lessee recognises a right-of-use asset and a lease liability for most leases. Lease rent is replaced by depreciation and interest, both of which fall below EBITDA. For a business with significant leased premises, such as retail, restaurants, warehousing or clinics, reported EBITDA rises materially after adopting the standard, without any change in cash.
This matters in three ways:
- Comparability: EBITDA of an Ind AS company and of a company following Indian GAAP Accounting Standards (where rent is an expense) are not directly comparable.
- Consistency with net debt: if the valuation uses EBITDA before rent ("post-Ind AS 116"), lease liabilities should be deducted as debt; if it uses EBITDA after rent ("pre-Ind AS 116"), they are usually excluded.
- Multiples: market multiples must be on the same basis as the EBITDA they are applied to.
Practical point: Mixing bases is a common error. Applying a pre-Ind AS 116 multiple to post-Ind AS 116 EBITDA, without deducting lease liabilities, overstates value. Due diligence reports usually present EBITDA both ways.
Worked example: from reported to normalised EBITDA
Consider a company following Ind AS, with reported EBITDA of ₹30 crore. Management proposes add-backs of ₹5 crore. The due diligence reviews these and identifies further items.
| Item | Management (₹ crore) | Due diligence (₹ crore) | Basis |
|---|---|---|---|
| Reported EBITDA (Ind AS 116 basis) | 30.0 | 30.0 | Audited accounts |
| Legal costs of a concluded dispute | +1.0 | +1.0 | Accepted: supported by invoices; no similar disputes in prior years |
| "Restructuring" costs | +1.5 | +0.5 | Partly accepted: ₹1.0 crore of similar costs recur every year |
| Promoter salary above market | +1.5 | +0.8 | Replacement CEO cost benchmarked at ₹1.2 crore versus ₹2.0 crore paid |
| Expected savings from new vendor contracts | +1.0 | 0.0 | Rejected: contracts not yet signed |
| Release of old warranty provision | – | (1.2) | Credit from earlier years' provision |
| Bonus under-provided versus policy | – | (0.6) | Normal charge added |
| Development costs newly capitalised | – | (0.9) | Consistent with prior years' expensing policy |
| Normalised EBITDA (Ind AS 116 basis) | 35.0 | 29.6 | |
| Less: lease rentals | (3.0) | Cash rent on premises | |
| Normalised EBITDA (pre-Ind AS 116) | 26.6 |
The gap between management's ₹35 crore and the due diligence figure of ₹29.6 crore is ₹5.4 crore. At a multiple of 8x, that is ₹43.2 crore of enterprise value. Presenting the figure also on a pre-Ind AS 116 basis (₹26.6 crore) allows the parties to choose a consistent multiple and treatment of lease liabilities.
Tests for accepting an adjustment
- Evidence: invoices, contracts, board approvals or payroll data support the amount.
- Non-recurrence: the item has not occurred in a similar form in other periods.
- Symmetry: one-off income is removed as readily as one-off costs are added back.
- Consistency: the same adjustment is applied to every year presented.
- Post-deal reality: the adjusted cost reflects what the business will actually pay after closing, including standalone costs where a carve-out loses group support.
Management adjustments versus diligence adjustments
Management adjustments are the seller's proposals; diligence adjustments are those identified or revised by the reviewer. Reports usually show both, so that the investor can see which add-backs were accepted, which were reduced and which new items were found. Adjustments that are "possible but not proven", such as pro forma savings, are often shown separately for the buyer to take a view on.
Frequently Asked Questions on EBITDA Normalisation
What is normalised EBITDA?
It is reported EBITDA adjusted for non-recurring items, non-market related party terms, provisioning and cut-off issues, and accounting policy changes, to show the recurring earnings of the business.
What is the difference between adjusted EBITDA and pro forma EBITDA?
Adjusted or normalised EBITDA corrects historical results for one-off and non-market items. Pro forma EBITDA additionally reflects events not fully in the historical period, such as acquisitions, new contracts or planned cost savings.
How does Ind AS 116 affect EBITDA?
It moves lease rentals out of operating expenses into depreciation and interest, increasing EBITDA. Valuation should then treat lease liabilities consistently as debt, or use EBITDA after rent.
Are transaction costs added back to EBITDA?
Generally yes, because costs of the sale process are not expected to recur, provided they are identified with evidence and not mixed with routine professional fees.
Why does a small EBITDA adjustment matter so much?
Because the price is often a multiple of EBITDA; at 8x, each ₹1 crore of EBITDA adjustment changes enterprise value by ₹8 crore.
Can promoter salary be adjusted in EBITDA?
Yes. If the promoter is paid above or below the market cost of a replacement executive, EBITDA is adjusted to that market cost, supported by benchmarking.
Conclusion
EBITDA normalisation brings discipline to a figure that directly drives price. Each adjustment should be evidenced, applied consistently and reflect the cost base after the transaction, with income and cost items treated symmetrically.
Presenting management and diligence adjustments side by side, and showing EBITDA on both Ind AS 116 and pre-Ind AS 116 bases, lets the parties focus the negotiation on the few items that are judgement calls rather than on the arithmetic.
This article is intended for general information and knowledge sharing only and does not constitute professional advice or solicitation of any kind. Provisions are summarised as of September 2026. Readers should refer to the relevant provisions, regulations and judicial pronouncements for their specific facts.