EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortisation. It's used as a proxy for a business's underlying operating cash generation, stripped of financing structure (interest), tax jurisdiction effects, and non-cash accounting entries (depreciation and amortisation) — all of which vary between businesses for reasons that have nothing to do with how well the underlying operation actually performs.
Why EBITDA, specifically
Two businesses can have identical operating performance and wildly different net profit — one might be debt-financed with high interest costs, the other debt-free; one might own its premises and depreciate them, the other might lease. EBITDA removes those differences so buyers can compare businesses on a more apples-to-apples basis, and it's the figure most valuation multiples ("4x EBITDA," "6x EBITDA") are actually expressed against.
What "recasting" adds on top
Reported EBITDA reflects how the business was actually run under its current owner — and owner-run SMEs very often carry costs that a new owner wouldn't. Recasting adjusts for those, producing an "adjusted EBITDA" that better reflects what the business would earn under different, more typical ownership.
- Owner compensation above (or below) a fair market rate for the role actually being performed
- Personal expenses run through the business — a vehicle, travel, or other costs with a personal element
- Genuinely one-off costs unlikely to recur — a lawsuit settlement, a one-time relocation, a bad debt write-off from a single unusual event
The part sellers usually underestimate: evidence
A recast adjustment is only as credible as the document behind it. "I paid myself less than market rate" is an assertion; a payroll record, a market-rate benchmark, and a clear explanation is evidence. A buyer's diligence team will unwind any add-back it can't verify — so an unsupported adjustment doesn't just fail to help the valuation, it actively damages credibility on every other number in the pack once it's found.
A defensible bridge from reported EBITDA to adjusted EBITDA — each step tied to a real source document, nothing asserted without evidence — is one of the highest-leverage pieces of preparation a seller can do before going to market.