“As a financial analyst preparing a sell-side quality-of-earnings analysis, you are tasked with normalizing a company's reported EBITDA by stripping out non-recurring items, to determine the Adjusted EBITDA a buyer should actually pay for.”
As a financial analyst preparing a sell-side quality-of-earnings analysis, you are tasked with normalizing a company's reported EBITDA by stripping out non-recurring items, to determine the Adjusted EBITDA a buyer should actually pay for.
Task: identify which items in Reported EBITDA are genuinely non-recurring, and compute the resulting Normalized (Adjusted) EBITDA a buyer should actually rely on.
You are given the following figures from the target company's most recent fiscal year income statement and management discussion.
| Line Item | Value |
|---|---|
| Reported EBITDA | $50.0m |
| Legal settlement expense (one-time litigation) | $4.0m |
| Restructuring / severance costs (one-time) | $6.0m |
| M&A process advisory fees (one-time) | $2.0m |
| Gain on sale of non-core assets (one-time gain) | $3.0m |
Think about which of the listed items are genuinely one-time and unrelated to the ongoing business.
Total Add-Back = Legal Settlement + Restructuring Costs + M&A Advisory Fees
Using this formula, compute the total non-recurring expense add-back.
Think about which of the listed items is a one-time gain unrelated to core operations, and how leaving it in would affect the valuation multiple a buyer applies.
Gain Adjustment = − Gain on Sale of Non-Core Assets
Using this formula, compute the adjustment for non-recurring gains.
Normalized EBITDA = Reported EBITDA + Non-Recurring Expense Add-Backs − Non-Recurring Gains
Using these inputs, compute Normalized EBITDA.
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