EBITDA Normalisation

EBITDA normalisation is the set of accounting and financial adjustments applied to a company's historical EBITDA to obtain a "normalised" or "recurring" EBITDA — one that is representative of the structural performance of the business independently of non-recurring events, exceptional charges and income, and items specific to the seller's situation. It is the fundamental step of any business valuation and any financial due diligence.

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The most frequent adjustments include: non-market management remuneration (excess above the replacement cost of a salaried executive), non-recurring charges (restructurings, exceptional litigation, transaction costs), non-recurring income (asset disposal gains, exceptional grants), charges related to non-operational assets (leases with related parties on non-arm's length terms), and effects of the seller's accounting policy (accelerated depreciation, discretionary provisions).

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The quality of normalisation is at the heart of the quality of earnings (QoE) concept, systematically analysed in PE fund and institutional acquirer due diligences. A normalised EBITDA too far from the accounting EBITDA — or poorly documented adjustments — generates tension in negotiations and can put the transaction price at risk.

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Example: a Swiss industrial SME shows accounting EBITDA of CHF 1.2 million. Normalisation identifies: excess management remuneration +CHF 180,000, non-recurring restructuring charges +CHF 120,000, above-market intra-group rents -CHF 90,000. Normalised EBITDA: CHF 1.41 million — 17.5% above accounting EBITDA. At 5x EBITDA, the impact on EV is CHF 1.05 million additional.

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At Hectelion, we conduct rigorous and documented EBITDA normalisations in all our Franco-Swiss valuation and due diligence mandates.