The owner’s EBITDA and the EBITDA a buyer will pay for are two different numbers

When the investor left the conference room, the owner gave his adviser a reproachful look and said: “This is not how I pictured our work together.”

He had walked into that meeting with EBITDA of PLN 12 million. He walked out with PLN 9.5 million. Nobody questioned a single invoice. The owner had excluded eleven costs from earnings as one-offs, and the buyer’s analyst asked the same question about each of them: will this expense come back next year? For seven of them the answer was yes.

A gap of PLN 2.5 million at a multiple of eight means PLN 20 million less in the price. The adviser had suggested going through these adjustments together beforehand, without the investor. The owner refused, because he knew his numbers. That day he was angry mostly with himself. I have changed the details so that neither the company nor the parties can be identified.

A business owner knows his earnings better than anyone, because he has looked at them every month for fifteen years. That is exactly why a quality of earnings review surprises him. The buyer’s analyst accepts the invoices as genuine and argues about classification: whether an event described as a one-off really will not recur, and whether costs that are missing from today’s earnings will appear after the transaction. The side that arrives without documents loses that argument.

Three levels of EBITDA

EBITDA is operating profit before depreciation and amortization. In a transaction it appears in three versions. The first is reported EBITDA, taken straight from the financial statements. Nobody bases a price on it.

The second is normalized EBITDA, which the owner presents in the information memorandum and considers the true figure. It is derived from reported EBITDA by excluding one-off events and dealings with the owner, his family and his other companies on terms that an unrelated counterparty would not accept. The path from the first figure to the second is shown in the EBITDA bridge, a schedule of the adjustments.

The third is EBITDA after the quality of earnings review (QoE for short) commissioned by the buyer. A statutory auditor checks whether the financial statements comply with the rules, while a QoE analyst assesses how much of the profit will recur in the coming years. He rejects some of the seller’s adjustments, adds a few of his own, and only that figure is used to calculate the price.

In my experience the difference between the second and the third figure is usually ten to twenty percent. In the company from the conference room it reached almost 21 percent.

A gap in EBITDA can also end the talks. The US deal platform Axial analyzed 75 transactions that fell apart in 2025 after the letter of intent had been signed. In 21.3 percent of cases the cause was EBITDA established in the QoE review that was clearly lower than the figure on which the price had been based. In 2023 the share was 10.6 percent.

Upward adjustments come from the seller

Business owners usually do not know that adjustments work both ways, so they come to the review on the defensive. The buyer’s analyst looks for adjustments that reduce earnings, because that is what his client pays him for. He has no reason to look for adjustments that increase earnings. If the seller does not bring them, they will not be part of the process.

The most common one concerns the owner’s pay. When an owner who is also the CEO pays himself PLN 2 million a year and the market salary of a CEO at a company of that size is PLN 600,000, PLN 1.4 million goes back into EBITDA. Salaries of family members whose work does not match their pay are treated the same way, as is rent paid to another of the owner’s companies above the market rate.

This group also includes costs that really are one-offs: a lawsuit that has ended, a system implementation, an office move. Analysts almost always accept the costs of the transaction itself, meaning the fees of advisers and lawyers and the cost of the reviews, provided they were charged to the company’s earnings. Then there are the costs of maintaining assets the business does not use, such as an empty property, and excessive provisions charged as a cushion to the costs of the year under review.

Pro forma adjustments are the hardest to defend. They restate earnings as if a change made during the year had applied from its start. A contract that started in December shows up in annual earnings at one twelfth, and a supplier agreement renegotiated from September lowers costs for only four months. Closing a loss-making product line justifies an adjustment if the decision was made before the process began and this can be proven. The buyer treats these adjustments with the greatest caution, because they concern profit the company has not yet earned.

One-off in name only

The areas the analyst checks are no secret. They shape the list of questions and documents the seller receives at the start of the review (the request list, in advisers’ jargon). Events described as one-offs and owner-related adjustments cause the most disputes.

The analyst applies a simple test. He checks whether a similar event occurred in the previous three years and whether anything suggests it will return. Items that come back regularly he treats as an ordinary cost of doing business, whatever they are called in the books. Severance paid three years in a row means staff turnover. A company that fights two lawsuits every year bears litigation costs as a matter of routine. Write-downs of receivables and inventory every year reflect the company’s ordinary trading risk. The same rule works the other way. A large order that will not be repeated will be taken out of revenue just like a one-off cost. Owners forget about it, because that adjustment works against them.

Owner-related adjustments also work both ways. An owner who draws a token salary and takes the rest as dividends overstates EBITDA by the difference to the market rate. Cars, phones, travel and other private expenses booked in the company almost always come to light. When the seller has not disclosed them himself, the analyst starts to wonder what else has been left out. Services from the owner’s other companies, provided on terms nobody has compared with the market, need the same recalculation as rent. Loans from related companies do not affect EBITDA, because the interest is booked in finance costs. The buyer will, however, treat such a liability like bank debt and deduct it from the price. Off-market interest, on the other hand, can be a tax risk.

Costs you cannot see in the earnings

The analyst also checks what is missing from costs. A provision is a cost entered in the books for a future expense, before the invoice arrives or cash leaves the company. Typical gaps are provisions for unused vacation, retirement benefits and warranty repairs, and write-downs of receivables that will never be collected. The annual increase in such liabilities lowers recurring EBITDA, so in the valuation it is multiplied by the multiple. Arrears built up over earlier years are treated by the buyer as debt and deducted from the price zloty for zloty, because after the transaction he will be paying for a period when the seller ran the company. Tax risks usually end up in the agreement: as a price reduction, as part of the price held in an escrow account, or as the seller’s undertaking to cover a specific loss (an indemnity).

In many processes neglected assets take the largest bite, and owners almost never count them. The analyst compares replacement capital expenditure, meaning spending on replacing worn-out machinery without increasing output, with depreciation and the age of the equipment. If the company put off replacing worn equipment for three years and spent half the depreciation amount on it, the buyer will have to fund those purchases right after the acquisition.

Postponed machinery purchases alone do not inflate EBITDA, because capital expenditure goes to the balance sheet and reaches earnings only through depreciation, which sits below that line. Holding back investment leaves cash in the company, but the buyer will deduct the amount of overdue purchases from the price. Postponed repairs and servicing work differently, because they are a current cost. Holding them back artificially raises the EBITDA shown in the memorandum. In the review the price therefore falls from that level twice: by the annual cost of servicing multiplied by the multiple, and by the cost of the overdue repair deducted zloty for zloty. Compared with a company that serviced its machines on time, the owner breaks even, because the cash he saved goes back through the price. What he loses is credibility for the rest of the review.

Another area is the shifting of revenue and costs between years: revenue booked before the service was performed, multi-year licenses and subscriptions recognized in full straight away, invoices issued at the end of December for work done in January, costs pushed into the following year. The analyst moves each such item to the right period.

Leases are a separate matter. A company that applies the Polish Accounting Act and treats leases as operating leases books the installments as external services, so they reduce EBITDA. A buyer that reports under International Financial Reporting Standards (IFRS 16), for example a listed group, recognizes the same contracts as depreciation and interest, that is, below EBITDA, and shows the outstanding installments as debt. In its accounts the same company therefore has higher EBITDA and higher debt. The amount the owner receives stays the same if the multiple comes from transactions calculated the same way. Higher EBITDA then usually goes with a lower multiple.

The revenue mix and working capital belong on the same list, although they more often affect the multiple and the amount the seller receives at closing than EBITDA itself. The buyer wants to know how much of the revenue recurs, whether the largest customer is bound by a contract or by habit, how many customers left over three years and where the margin comes from. Four years without a price increase means either a hidden reserve or a hidden problem. In working capital, payment terms to suppliers stretched just before the sale show up at once. The minimum cash that has to stay in the company after closing is a separate subject, and the other areas of the review are covered in the article on due diligence.

The dispute over an adjustment and its limits

This conversation almost always goes the same way. The analyst asks for documents confirming that the cost will not occur next year. The burden of proof lies with the seller, and that decides the outcome. A documented adjustment goes through, while one supported only by explanation is lost, even if it is true. On a single item, several hundred thousand zlotys of EBITDA can be at stake, which at a multiple of eight means several million zlotys in the price. Preparing for the review is above all about gathering evidence: resolutions, contracts, invoices, correspondence, and market valuations of rents and salaries.

A diligent adviser goes through the review areas with the owner before the process starts, picks out the same items the buyer’s analyst will later point to, and shows how much each one will take from the price or add to it. Defending adjustments that cannot be defended is not part of his job. Most downward adjustments are not negotiable.

If the owner drew a salary below the market rate, the difference will go into costs, because after the transaction the CEO, whoever it is, will be paid the full rate. Rent will be recalculated at market rates, because those are the rates the company will pay. A cost that occurred three years in a row will be treated as recurring, because that is what the company’s own financial statements show. Overdue capital expenditure will be deducted, because someone will have to pay for it.

What can be negotiated is the size of an adjustment when the seller has documents and the other side only an estimate, and the classification of an event that genuinely sits on the borderline. The calculations also have to be symmetrical: an analyst who takes out one-off revenue should also take out the costs that came with it. Finally, the parties have to agree how a risk goes into the agreement: as a price reduction, an amount held in escrow, or the seller’s undertaking to cover a specific loss.

That is why the conversation before the process can be unpleasant. In it, the adviser tells the owner that the company earns PLN 2.5 million less than he thought, and that nobody will change that. Owners react in different ways. Some decide the adviser is overly cautious. Others hope to defend the adjustments in negotiation or to find a buyer who will look at them more kindly. These hopes end the same way as for the owner in the conference room, only later and in front of witnesses.

What an early diagnosis gives you

An early diagnosis lets you set the asking price from the right figure, so negotiations do not start from a level that was fictional anyway. It also gives you time to document adjustments, brings items in the seller’s favor into the review and protects the seller’s credibility. An analyst who has found one undisclosed adjustment stops checking the items presented and starts looking for new ones, and that shows in the rest of the review.

Time is the most valuable part. Some problems can be fixed in the company itself within a year: catching up on capital expenditure, creating provisions, putting dealings with related companies in order. Fixed a year earlier, they stop being adjustments and become the company’s normal state. In the seventh week of the review it is too late for that.

At Capital One Advisers we go through adjustments in both directions with the client before the first contact with an investor. Before signing the first non-disclosure agreement, the seller should know his EBITDA after restating management pay and rent at market rates, and should have a document for every adjustment in his favor. Costs that recurred over the last three years, missing provisions, overdue spending on machinery and recent changes in working capital also need to be calculated in advance.

The owner from the conference room could not have defended the seven rejected adjustments a year earlier either, so his company had been worth PLN 20 million less than he assumed from the start. By hearing this assessment only in front of the investor, he lost something harder to count. The asking price had been set from an inflated figure, so every reduction looked like a concession. The investor also saw a seller who knew his own earnings less well than he had claimed.

Sell-side advisers disagree on one question that no calculation will settle. Some show EBITDA in the memorandum already net of the adjustments the seller cannot defend. They accept lower first offers so that, once the letter of intent is signed, a buyer who already has exclusivity has no pretext to cut the price. Others leave the higher figure and count on competition among several buyers to make a cut after the review harder. At Capital One Advisers we take the first approach. In an auction where four buyers know about each other, though, the case for the second is stronger than most sell-side advisers admit.

Service: M&A advisory on a company sale