Normalised EBITDA: Methodology, Restatements and Impact on Valuation

Normalised EBITDA: methodology, restatements and impact

Introduction: the trap of accounting EBITDA

During a disposal process, a business owner presents their accounting EBITDA to a buyer: €900k. The buyer commissions an independent financial due diligence. After restatements, normalised EBITDA comes out at €650k. At a constant multiple of x7, the valuation drops from €6,300k to €4,550k. The gap: €1,750k — 28% of the price the seller initially expected.

This scenario is one of the most common in Franco-Swiss mid-market M&A transactions. Normalised EBITDA is the foundation of any defensible business valuation process — and yet no accounting standard provides a normative definition. Not IFRS, not US GAAP, not French GAAP (PCG), not Swiss GAAP FER. It is the practitioner — M&A advisor, valuation expert or transaction auditor — who constructs the definition, transaction by transaction.

As the EY Transaction Advisory Services reference guide (2008) states: “It is essential to propose a precise definition of EBITDA in the SPA.” This requirement, applicable to large transactions, applies with equal rigour to unlisted SMEs and mid-sized companies.

The central issue: an unnormalised EBITDA can cause the valuation to vary by 20 to 40%. In the context of a tax ruling with the FTA, a banking negotiation for a family LBO, or a judicial valuation, an undocumented basis is unacceptable. It exposes the seller to a devastating counter-offer, and the buyer to post-closing surprises.

This article presents the four EBITDA levels used in M&A practice, the ten restatement categories, the three net debt definitions, the working capital adjustment method, the limits of adjustments, errors to avoid, and Franco-Swiss specificities.

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Origin and foundations

EBITDA — Earnings Before Interest, Taxes, Depreciation and Amortization — originated in American LBO practice of the 1980s, where practitioners sought an operating cash flow indicator that neutralised the effects of capital structure and depreciation policies.

Its strength is comparability: two companies from different sectors, countries or accounting frameworks can be compared on the basis of their EBITDA. Its weakness is precisely its absence of normative definition — making it a malleable aggregate, susceptible to flattering presentation by the seller or conservative presentation by the buyer.

EBITDA differs from EBIT (which includes depreciation and amortisation), from operating income (which also includes provisions), and from net income (which incorporates capital structure and taxation). For an unlisted SME, gross accounting EBITDA is almost systematically distant from the economic reality of the business — it must be normalised before applying any multiple or discount rate. See our article on valuation approaches and methods.

The four EBITDA levels

Transactional practice distinguishes four successive EBITDA levels, each corresponding to a stage of the normalisation work:

Management EBITDA: EBITDA as presented by the owner in internal reporting. This is the starting point — not yet validated, not yet adjusted.

Adjusted EBITDA: after corrections for accounting and presentation adjustments (reclassifications, periodisation errors, cut-off corrections). Comparable basis.

Recurring EBITDA: after restatement of non-recurring items (restructuring, litigation, exceptional charges). This is the valuation basis.

Proforma EBITDA: after scope adjustments (carve-in / carve-out), GAAP changes or accounting method changes. This is the defensible basis before the FTA in a tax ruling context, and before banks in an acquisition financing context.

Application context

Normalised EBITDA is used in four main contexts.

In the context of financial due diligence — buy-side or sell-side (Vendor Due Diligence) — it constitutes the cornerstone of the Quality of Earnings report. It is the most debated section between parties in any M&A negotiation.

In an independent valuation engagement, it directly conditions the valuation by EV/EBITDA multiples and the DCF method. An unnormalised EBITDA produces an indefensible valuation. See our article on sector valuation multiples.

In the context of a tax ruling with the FTA, the normalised basis must be documented and justifiable. Cantonal tax authorities require a yield basis consistent with the economic reality of the company.

In the context of a banking negotiation for an LBO or a family business transfer, the net debt / normalised EBITDA ratio is the central metric required by banks and guarantee organisations (FAE, Cautionnement romand, BG Mitte) — generally capped at 3.5x to 4x. See our article on financial structuring.

Methodology: the ten restatement categories

A — Owner’s remuneration

The first systematic restatement in any SME. The owner’s remuneration is frequently either under-stated (to maximise distributable profit) or over-stated (to minimise corporate income tax). In both cases, it must be restated to the market level corresponding to the role profile (CEO, MD, COO depending on company size). The reference is the replacement cost of an equivalent employed manager.

B — Non-recurring items

Restructuring, litigation, provisions for resolved risks, debt waivers (granted or received), asset disposal gains, exceptional grants, prior-period charges. Attention to recurring items included in exceptional results — frequent under French PCG (income and charges on operating transactions, recurring asset disposals).

C — Profit-sharing and incentives

Profit-sharing and incentives must be reintegrated into EBITDA (EY TAS, 2008). In France, profit-sharing is a legal obligation from 50 employees — it must be maintained in the calculation if it is intended to be permanent. In Switzerland, incentives are contractual — restatement depends on the permanence and discretionary nature of the arrangement.

D — Lease and property costs

An owner-occupied property lease at an above or below-market rent is a systematic restatement. Finance leases and financial rentals are treated differently depending on the accounting framework: IFRS 16 (restated as depreciation + financial charge, positive EBITDA impact), French PCG (operating charge, maintained in EBITDA), Swiss GAAP FER (close to IFRS on this point).

E — Management fees and group charges

Intragroup recharges (management fees, brand royalties, shared services), fees to a holding company linked to the owner. These charges may conceal additional owner remuneration or value transfers outside the scope. Post-disposal, the stand-alone replacement cost of these services must be integrated (carve-out costs).

F — R&D and capitalised expenses

Capex disguised as operating charges (heavy maintenance treated as an expense). Capitalised R&D costs to restate by nature (development vs research). Discretionary expenses (marketing, maintenance) budgeted and not yet incurred before closing.

G — Revenue pull-forward and manipulation

Revenue management before closing: accelerated deliveries, early invoicing, extended customer payment terms to inflate revenue in the reference period. Cut-off and revenue recognition issues: margin shift from one period to another. Unprovisioned year-end rebates. Detecting this type of adjustment is one of the key roles of financial due diligence.

H — Benefits in kind and personal expenses

Company vehicles, life insurance for the owner’s benefit, personal travel, excessive entertainment expenses, discretionary subscriptions and memberships. These items must be identified line by line in the charge analysis.

I — Provisions and deferred charges

Provision reversals where the provisioned amount exceeds the actual cost. Charges to be spread over several periods (biannual trade fairs, periodic certifications, cyclical major works). Holiday pay / RTT / bonus provisions to be allocated to the reference period. Exceptional one-off bonuses, carried interest, exercised stock options.

J — Scope and GAAP changes

Scope variation: acquisition or disposal of a subsidiary during the period requires a pro forma EBITDA at constant scope. Accounting method changes (IFRS / PCG / Swiss GAAP FER transition) that can significantly alter the published EBITDA level. Costs linked to carve-out issues.

Net debt: three definitions depending on the parties

Net debt is the other key variable in the Equity Value calculation: Equity Value = Enterprise Value − Net debt. Its definition is systematically subject to negotiation between seller and buyer. See our article on valuation premiums and discounts.

Restricted definition — proposed by the seller: bank loans, shareholder current accounts, bonds, bank overdrafts, overdraft facilities, finance lease debt, discounted bills, less cash and short-term investments.

Broad definition — buyer standard: adds off-balance sheet commitments (finance leases, stock options, golden parachutes, fair-value financial instruments, share escrow, buy-back agreements), unfunded pension liabilities, unspent budgeted capex, factored or securitised receivables, profit-sharing debt, voted but undistributed dividends.

Extensive definition — LBO standard: further adds repayable grants (change of control clause), restructuring costs announced to employees, environmental provisions, net deferred taxes, bonuses due and unpaid at closing, property supplier payables, advisor fees payable, out-of-scope intragroup balances.

Fundamental rule: any item already incorporated into the valuation via EBITDA must not be included in net debt, to avoid double-counting.

The working capital adjustment

The vast majority of transactions include a working capital adjustment clause in the SPA. This adjustment increases or decreases net debt to account for working capital seasonality and protect the buyer against pre-closing working capital manipulation.

12-month average method: the adjustment equals the difference between working capital at closing and the average over the last 12 months. Requires validated monthly accounts. Protects against seasonality. High working capital at closing mechanically increases net debt and reduces Equity Value.

Budgeted method: the adjustment is calculated against a pre-negotiated budgeted amount. Favours the buyer at seasonal working capital peaks. Simpler to implement but less precise.

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Impact on valuation

The impact of normalisation on valuation is direct and mechanical. For a company valued on an EV/EBITDA multiple basis, every euro of downward restatement is multiplied by the sector multiple.

Illustrative case (fictitious data) — Industrial SME, Rhône-Alpes

Accounting EBITDA: €900k. Restatements: owner’s remuneration +€80k, market rent −€60k, profit-sharing reintegrated −€40k, non-recurring charge +€110k, revenue pull-forward −€40k. Normalised EBITDA: €950k (+€56k net). Sector EV/EBITDA multiple: x6.5. Enterprise Value: 950 × 6.5 = €6,175k. Broad net debt: €800k. Equity Value: €5,375k.

Without upward normalisation of certain items, the valuation would have been significantly lower — illustrating why normalisation works in both directions and must be conducted with rigour.

Franco-Swiss specificities

Several structural differences distinguish the treatment of normalised EBITDA in France and Switzerland.

Owner’s remuneration: French employer social charges (approximately 40 to 45% of gross salary) are significantly higher than Swiss social charges (approximately 12 to 15% depending on canton and scheme). Restatement to market-rate remuneration therefore produces very different amounts depending on the country. See our article on valuation differences between France and Switzerland.

Profit-sharing and incentives: in France, profit-sharing is a legal obligation from 50 employees (approximately 5 to 8% of current net income). In Switzerland, incentives are contractual and discretionary. This restatement can represent €50k to €150k for a medium-sized SME.

Finance leases: IFRS 16 (applicable to consolidated groups) restates rents as depreciation + financial charge, mechanically improving EBITDA. SMEs under French PCG or Swiss GAAP FER (without IFRS consolidation) maintain rents as operating charges — their EBITDA is therefore depressed compared to a comparable consolidated group.

The tax rate differential (25% France vs ~15% Switzerland) does not directly impact EBITDA but influences post-tax flows used in the WACC and in the DCF method.

Limits of adjustments

EBITDA normalisation is a judgement exercise, not an exact science. Its limits are real and must be made explicit in any serious valuation or due diligence report.

The first limit is the subjectivity of restatements. The choice of market remuneration level for the owner, the classification of an item as recurring or non-recurring, or the applicable market rent — all these judgements are defensible within a range, not at a precise point. Two practitioners can arrive at slightly different results on the basis of the same data.

The second limit is the risk of aggressive normalisation. In a sale context, the seller or their advisor may be tempted to maximise positive restatements (excluding recurring charges, incorporating synergies, including future revenues not yet earned). An independent financial due diligence commissioned by the buyer is the indispensable counter-expertise.

The third limit is the reference period. The 3-year average smooths cyclical variations but may conceal recent deterioration. LTM (Last Twelve Months) is more representative of the current situation but more sensitive to exceptional items. Both must be presented and commented upon.

The fourth limit is the absence of enforceable normative value. Normalised EBITDA is not defined in any accounting framework. In post-closing disputes (asset and liability warranty, price adjustment clause), its defensibility depends entirely on the quality of its documentation in the SPA and in the due diligence report.

Errors to avoid

1. Confusing accounting EBITDA with normalised EBITDA. Applying a sector multiple to an unrestated EBITDA is the most frequent error among business owners who self-value their company. The gap can represent 20 to 40% of the final valuation.

2. Omitting the EBITDA definition from the SPA. The absence of a precise contractual definition of EBITDA in the disposal agreement is a frequent source of post-closing disputes on price adjustment clauses (earn-out, completion accounts).

3. Double-counting between EBITDA and net debt. An item already included in the valuation via EBITDA must not be included in net debt. Classic example: a litigation provision already excluded from EBITDA as non-recurring must not also be integrated into net debt.

4. Ignoring working capital seasonality. A closing at a working capital peak without an adjustment clause, or with a poorly drafted clause, can reduce Equity Value by several hundred thousand euros without the seller anticipating it.

5. Restating without documenting. Every restatement must be justified by an accounting document, a contract or verifiable market data. An undocumented restatement will be challenged by the buyer, the FTA or a judge.

6. Neglecting off-balance sheet items. Off-balance sheet commitments (finance leases, stock options, golden parachutes, guarantees given) are systematically integrated into broad net debt by buyers. Ignoring them produces an overvaluation that collapses during negotiation.

7. Using a non-representative reference period. An exceptional financial year (COVID, one-off contract, launch year) included in the 3-year average without restatement distorts the valuation basis.

Advantages and limitations of multiples applied to normalised EBITDA

The multiples method applied to normalised EBITDA offers three major advantages: speed of implementation, market anchoring (multiples reflect recent transactions), and readability for all parties. Its limitations are equally real: it does not capture future growth, is sensitive to the restatements retained, and suffers from a scarcity of comparables in the unlisted SME segment. This is why Hectelion systematically cross-references multiples with a DCF and a net asset approach in its independent valuation engagements. See our article on sector valuation multiples.

A word from the Managing Director

Normalised EBITDA is the indicator on which the substance of an M&A negotiation plays out. It is not an accounting figure — it is an analytical construction that reflects the recurring economic reality of the business, independently of its accounting choices and the owner’s remuneration policy.

What we regularly observe at Hectelion: business owners who arrive at negotiations with an accounting EBITDA, without having anticipated that the buyer will systematically commission a due diligence to restate it. The gap between the EBITDA presented and the normalised EBITDA retained can represent €1m to €3m of price difference on a mid-market SME. This is not a negotiation — it is a methodological reality.

Our approach: conduct normalisation on the seller’s side before any market launch, to anticipate the buyer’s adjustments, defend every restatement with irreproachable documentation, and arrive at negotiations with a defensible basis rather than an inflated one.

Aristide Ruot, Ph.D — Founder & Managing Director, Hectelion

FAQ — Normalised EBITDA

What is the difference between Adjusted EBITDA, Recurring EBITDA and Proforma EBITDA?

Adjusted EBITDA corrects accounting and presentation errors. Recurring EBITDA additionally excludes non-recurring items. Proforma EBITDA further incorporates scope and GAAP adjustments. This last level serves as the defensible basis for valuation, FTA ruling and banking negotiation.

How does the FTA treat normalised EBITDA in a ruling?

The FTA requires a yield basis consistent with the economic reality of the company. The practitioners’ method, recognised by Swiss cantonal tax authorities, uses the capitalised earnings value based on normalised income. Restatements must be documented and justifiable.

Is an auditor needed to normalise EBITDA?

No — normalisation is carried out by the M&A advisor or valuation expert in the context of a due diligence or valuation engagement. A statutory auditor may intervene to validate source data, but the normalisation itself falls to the transactional practitioner.

What net debt definition is retained in an M&A transaction?

It is systematically subject to negotiation in the SPA. The seller proposes the restricted (accounting) definition. The buyer requires the broad definition (off-balance sheet commitments included). In an LBO context, the extensive definition applies.

Is normalised EBITDA enforceable in a dispute?

Its defensibility depends entirely on its documentation in the SPA and in the due diligence report. A normalised EBITDA not contractually defined or documented is very difficult to defend in post-closing litigation.

How does Hectelion conduct normalisation?

Hectelion conducts normalisation as part of its financial due diligence and business valuation engagements. Every restatement is documented, sourced and quantified in an EBITDA bridge table. Normalisation is systematically presented in a cascade of the four EBITDA levels.

What are the main differences between France and Switzerland?

The main gaps concern owner’s remuneration (social charges), profit-sharing (statutory in France, contractual in Switzerland), finance lease treatment (IFRS 16 vs PCG vs Swiss GAAP FER) and the corporate tax differential (25% vs ~15%). See our article on business valuation: France vs Switzerland.

Would you like to have your business valued or conduct a financial due diligence?

Hectelion conducts all these engagements in France and Switzerland — valuation, due diligence, financial structuring, disposal, acquisition.
→ Book a call — 30 minutes, confidential

Conclusion: Normalised EBITDA — the foundation of any defensible valuation

Normalised EBITDA is not an accounting figure — it is a rigorous analytical construction that conditions the quality and defensibility of any business valuation, any disposal or acquisition process, and any banking negotiation in the context of financial structuring.

Its ten restatement categories, the triple net debt definition and the working capital adjustment constitute a methodological framework that M&A practitioners apply systematically — and that every business owner considering a disposal should master before entering negotiations.

At Hectelion, EBITDA normalisation is the first act of every financial due diligence and valuation engagement. It systematically precedes the application of valuation methods — multiples, DCF or the FTA practitioners’ method. A valuation report without documented EBITDA normalisation is a report without foundation.

Sources

EY Transaction Advisory Services — TAS Reference Guide, EBITDA and net debt methodology (2008)
Damodaran, A. — Investment Valuation, 3rd ed., Wiley, 2012
Argos Index® mid-market — Epsilon Research / Argos Wityu, Q4 2025
Swiss Federal Tax Administration (FTA) — Circular letters on reference rates 2025 and 2026 — estv.admin.ch
Swiss GAAP FER — Foundation for accounting and reporting recommendations
Autorité des normes comptables (ANC) — PCG France
Hectelion observation (2026)