Normalizing adjustments or addbacks are important for valuing a business because they reflect the true economic performance of the business and allow for a fair comparison with other businesses in the same industry. By removing the effects of non-recurring or discretionary transactions, the normalized EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or SDE (Sellers Discretionary Earnings) represents the sustainable earnings of the business that can be used to estimate its future cash flows and apply an appropriate EBITDA/SDE multiplier. Normalized EBITDA/SDE also helps to identify the potential synergies or cost savings that a buyer can achieve by acquiring the business. It is important to understand that if one is paying below or above market rent, the former would reduce EBITDA/SDE while the latter would increase it.
Adjusted Cash Flow Necessary to Reflect True Economic Performance
- by Lisa Riley
