Start with a reconciled profit figure
Choose the relevant reporting period and reconcile the figures to the accounts. Record whether you are using EBITDA, operating profit or another measure, then keep that definition consistent. An enterprise-value multiple and an equity-value multiple relate to different earnings and financing assumptions. Mixing them can produce an apparently precise but incoherent calculation.
An add-back is a proposition to test
For each proposed adjustment, state the amount, period, explanation and supporting record. Ask whether the cost will genuinely cease, whether an equivalent cost will arise and whether a buyer could obtain the same benefit. A legal expense connected with one completed event may warrant consideration; similar legal costs recurring each year need a different explanation.
Worked example: replacing the owner’s work
| Earnings bridge | Illustrative amount |
|---|---|
| Reported EBITDA | £180,000 |
| Add genuine non-recurring expense | + £20,000 |
| Add owner remuneration already charged | + £100,000 |
| Deduct realistic replacement role cost | − £80,000 |
| Illustrative normalised EBITDA | £220,000 |
The net owner adjustment here is £20,000, not £100,000. The illustration does not select a valuation multiple or establish company value. Recruitment costs, management depth and transition arrangements may require separate consideration. Use evidence for the actual responsibilities, rather than assuming the job title describes the work.
Do not overlook negative adjustments
Normalisation can reduce earnings. Below-market rent, deferred maintenance, under-resourced management or temporary supplier concessions may make recent profit look stronger than the sustainable position. Related-party arrangements need commercial context. Review revenue cut-off, recurring costs and the consistency of accounting treatment before concentrating on additions to profit.
Build a transparent adjustment schedule
Use columns for the accounting reference, original amount, proposed adjustment, evidence and treatment in the valuation. Identify disputed items rather than burying them in a single adjusted total. Keep a clear bridge from reported to normalised performance, and consider scenarios where uncertain adjustments are excluded.
Next, examine owner dependence and the pre-sale valuation brief.