What Is Normalised EBITDA (NEBITDA)
Normalised EBITDA is an attempt to ascertain what the profitability of the business will be for the Buyer post-sale before tax hence the term ‘normalised’. For the Normalised EBITDA calculation, we take the Operating Profit on the annual report and then 'add back' all the benefits that are going to the Seller. These can include the owner's salary (usually for 1 owner), director's pensions, director's cars and any other personal owner expenses. We also add back non-cash items like depreciation/amortisation and one-offs costs or loss of profit due to a fire or the company disposed of an asset. There also tend to be one- off adjustments for Covid impact and government grants related to the pandemic. There are also often negative add-backs (or take-backs) that come into play. These occur generally to adjust the owner's salary for his replacement to a market wage as they may have been taking dividends instead of a salary. This also applies to other employees that have not taken a market wage or other staff that may be necessary for the business to continue (a CFO/finance function is common). Negative add-backs can also be generated from rent that is not at market rate and also capital equipment refresh costs that may be necessary in the future that have not been kept up to date in the last couple of years. Further complicating the equation is what time period do we measure Normalised EBITDA for? The simple answer is that business valuation is based on the future cash flow so intrinsically we are trying to predict what future cash flow a Buyer will enjoy. However, historical financial performance is usually essential to determine what the future performance of the business will be.
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