Key Takeaways
- Sellers must present Adjusted Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) with evidence-based normalization adjustments to build trust with buyers and maintain credibility in competitive deal processes.
- Buyers increasingly expect Adjusted EBITDA to connect directly to sustainable free cash flow and demonstrated cost savings that reflect business reality.
- Transparent valuation practices and disciplined financial reporting help sellers reduce skepticism, withstand due diligence and improve transaction outcomes.
If you’re a part of the deal community, you’ve likely come across memes targeting Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA). Be it the tongue-in-cheek definition, “Earnings Before Intervention, Therapy, Depression and Anxiety” or the humorous visuals of a dramatic transformation from unimpressive Reported EBITDA to investment worthy Adjusted EBITDA, the satire in these memes speaks volumes.
The humor underscores a deeper truth rooted in reality that calls for greater rigor, transparency and consistency in presenting underlying earnings. There is no shortage of examples where the concept of Adjusted EBITDA has been stretched to obscure financial realities.
In today’s deal environment, buyers are demanding a more robust due diligence standard, grounded in defensible metrics. Seller’s EBITDA normalization adjustments and cash flow are under sharper scrutiny. At the same time, sellers who can credibly demonstrate EBITDA strength are in the best position to command premium valuations and drive competitive bidding.
Understanding the Market Dynamic
Over the last five years, the deals market in the U.S. has experienced extreme volatility, swinging from crisis-driven divestitures to sugar-rush recovery, followed by a slow-down and then a strategic reset. With this, buyer and seller behaviors have evolved rapidly to keep pace.
Finally, in a more balanced and informed market of today, disciplined deal-making, anchored in fundamentals, is returning. As buyers increasingly prioritize resilient, future-proof businesses, sellers are challenged to pivot from chasing valuations to demonstrating credibility and defensible detailed growth opportunities. Those who do so not only withstand scrutiny but also gain negotiating leverage and ideally secure superior outcomes.
Balancing Opportunity and Credibility in Sell-Side Quality of Earnings
In a typical deal, sellers present a version of EBITDA, adjusted for non-recurring, non-operating items of income or expense and other accounting adjustments, collectively referred to as normalization adjustments. Sellers also proactively include “pro forma” EBITDA adjustments to most recent operating results as if events expected to occur in the future have already taken place. These include items such as uncaptured synergies from recent business initiatives, like savings from organizational restructuring. They also cover benefits expected from planned or partially realized commercial or operational improvements, such as the impact of prices re-negotiated with significant customer or process changes that drive cost efficiencies.
Normalization adjustments eliminate distortions in reported historical results and seek to reflect true business profitability which, when overlaid with pro forma adjustments, provides buyers with a proper baseline to evaluate business projections. A seller’s divestiture strategy typically involves eliciting multiple bidders for the business. The case for pro forma EBITDA adjustments emanates from this market dynamic that offers bidders, in particular private equity (PE) bidders, a view into value creation opportunities that support a competitive bid.
While many normalizations and pro forma adjustments are valid and necessary to assess the true earnings potential of a business, the Adjusted EBITDA metric is susceptible to misuse. Sellers routinely introduce excessive and subjective expense reversals with limited supporting evidence, in an effort to inflate the value of their divestment. For example, recurring “non-recurring” expenses described as strategic investments or consulting and “run rate” cost savings that are largely aspirational.
In the current market environment, these practices are no longer just triggering a valuation push-back, buyers are increasingly characterizing these as a matter of trust and credibility. Conversely, sellers who demonstrate rigorous, evidence-based adjustments signal strength, build trust with investors and often generate competitive tension that drives valuation upward.
What’s Driving the Pushback from Buyers?
An environment of macro-economic uncertainty, elevated interest rates and selective credit has triggered a shift toward more disciplined investor behaviors. The following three factors appear to be the most compelling reasons for the pushback from buyers:
- A demand from investors for a greater return to compensate for increased risk in the current environment. Every dollar of inflated or unjustified Adjusted EBITDA has a disproportionate impact on valuation and deal returns. This mindset brings about skepticism in evaluating EBITDA adjustments.
- Aggressive bidding from PE buyers last seen over 2021-2022 has cooled down. PE buyers are taking their time to evaluate each opportunity to see where real value can be created. With that, evidence-backed Adjusted EBITDA and planned synergies that are truly achievable have become priority.
- Limited partners (LPs) at PE funds demand further transparency and lenders are tightening underwriting standards.
In this climate, sellers that can credibly present Adjusted EBITDA as both defensible and value-accretive are best positioned to differentiate their businesses and achieve stronger transaction terms.
What Buyers Really Want Instead
Buyers are still focused on Adjusted EBITDA. However, increasingly, buyers want more comfort with how EBITDA translates to free cash flows and how recurring and predictable that is. They are looking for a clear coherent narrative, scenario-tested cash flow models and other forms of substantiation that are aligned with business reality. For the more complex pro forma adjustments, buyers expect not only robust supporting evidence but also a demonstrated history of successful execution of similar cost reduction or operational improvement initiatives, that help enhance confidence in management’s ability to deliver the planned synergies.
In other words, credibility doesn’t limit upside — it unlocks it. Sellers who can connect Adjusted EBITDA to sustainable cash flow and future growth are in the strongest position to attract aggressive bidders.
Optimizing Deal Value for Our Clients
Our work in Transaction Services over the past several years has given us extensive experience in reviewing EBITDA across a range of businesses and industries. We follow the market closely and provide our clients with advice that helps them optimize value. A few recent examples include:
- We helped a value-added reseller of fraud prevention and merchant solutions identify $1.2M of price synergies of an implied value of $15M, on a $100M deal.
- In the case of a recent professional services firm looking to divest, we identified net pro forma adjustments of an aggregate of $5.5M, each adjustment adequately corroborated with clearly documented evidence and a confirmed trail of cash flow, unlocking substantial value for the sellers.
These examples illustrate that disciplined, evidence-backed adjustments not only withstand diligence scrutiny but also deliver measurable valuation uplift and stronger negotiating power for our clients.
We Can Help
Sellers who prepare and treat EBITDA not as a marketing tool, but a thoughtfully calculated performance metric will most likely win the confidence of today’s cautious buyer. More importantly, they will position themselves to extract maximum value in a competitive auction or negotiation.
As the remainder of 2025 unfolds, the bridge between Reported and Adjusted EBITDA is no longer just a meme-worthy punchline, it’s a red-flag in the eyes of investors and diligence teams that needs to be proactively addressed. PKF O’Connor Davies works closely with business owners and private equity firms throughout the transaction lifecycle to manage risk and optimize outcomes. Our integrated advisory approach goes beyond diligence — combining financial rigor with deal strategy to help clients both protect and enhance value.
Contact Us
For questions or to learn more about how we can support your transaction, contact your PKF O’Connor Davies client service team or:
Shilpa Bhandarkar
Director
Transaction Advisory Services
sbhandarkar@pkfod.com
Jonathan Moore
Partner-in-Charge
Advisory Services
jmoore@pkfod.com
Alberto Sinesi
Director
PKF Investment Banking
asinesi@pkfib.com | 203.273.5024
Robert Murphy
Partner
PKF Investment Banking
rmurphy@pkfib.com | 201.788.6844