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Some Thoughts About Adjustments: The Game Changer For Any Deal?

Analyzing financial statements also means presenting sustainable financials. As an analyst, advisor, or potential investor, you need to be aware that financials are (almost) never presented sustainably. There are (almost) always items that distort the picture. We account for these via EBITDA adjustments.

EBITDA adjustments matter as many investors use this figure to either make a bid (“EBITDA multiple”) or use this for the discounted cash flow model. The EBITDA is a good proxy for the operating cash flow and therefore receives much attention from potential investors. In addition, knowing the “true” EBITDA helps investors analyze the quality of any business plan.

Look at these two examples:

  1. Let’s say a company had to pay $100 in a lawsuit last year. Then these $100 present a one-off and non-recurring payment and need to be removed from the income statement (assumption: there have never been lawsuits)
  2. Let’s say that company has a recurring level of $40 in lawsuits each year. Then the one-off portion exceeding this amounted to $60 (100–40) last year and needs to be treated as a potential adjustment item.

Sustainable financials exclude any effects from one-offs, non-recurring, or out-of-period items. And sustainable financials also account for potential stand-alone topics and are presented on a pro-forma normalized basis.

In the following article, I am going to guide you through the adjustment process and help you gain a better understanding of potential items.


All non-recurring items, one-offs, or out of period, need to be considered as potential adjustments. Normally, these adjustments are driven by past events and it is paramount to understand what is typical and what is atypical in the industry.

The following items are considered here:

  • severance payments,
  • reversals of provisions where expenses occurred in other periods,
  • legal or consulting expenses beyond the normal level,
  • headhunter fees,
  • joining bonuses,
  • settlement payments,
  • restructuring costs.

Carve-out considerations

In a carve-out, the company that will be sold/acquired is part of a larger company or conglomerate. For example, the US subsidiary of a German company, or a specific business unit of a company. In both examples, the carve-out entities are part of “something larger” and there are - typically - significant intercompany relations. For example, the US subsidiary of the German company only hired few people in marketing and accounting, as this is done centrally in the headquarter. The business unit does not have own HR personnel, as this is also done in the headquarter.

It is often observed that in these situations, these entities pay a headquarter fee to distribute the costs for the central functions across all entities. This fee might be appropriate and no further action is required. Or it might be too high or too low.

With that in mind, carve-out considerations comprise everything related to the stand-alone ability of the company:

  • What is needed for the company to run on its own?
  • Does it need HR personnel?
  • How many employees are needed in marketing and accounting?
  • Is the current headquarter fee justified?
  • Will water, gas, and electricity increase? Oftentimes, larger companies have a higher purchasing power allowing them to negotiate discounts. A smaller company might not be able to achieve this.

Depending on the transaction, some companies opt for a service agreement to provide these services also after the transaction. If it is temporary, it’s called a “transitional service agreement”.

Pro-forma considerations

Pro-forma considerations are typically driven by future events or by structural changes. Pro-forma adjustments form a comparable basis to analyze historical and projected financials.

These considerations could cover the following: the current owner does not pay herself/himself a salary that an external manager would receive. After the transaction, however, an external manager will be hired. Last year, a plant was closed which will not be reopened.

When performing pro-forma adjustments, it is necessary to look at any topics that led to structural changes, like acquisitions, or divestments or that will lead to structural changes, like a new remuneration system.

The reason for that is to analyze financials on a comparable basis. If the historical figures include a remuneration system that differs significantly from the one included in the business plan, the figures are not comparable. By considering this and presenting historical figures as if these changes were already in place, an investor can understand the financials more easily.

Key takeaways

  1. Understand what is typical and what is atypical to form a basis for the adjustments
  2. Conduct a plausibility check, if historical EBITDA margins match projected margins. If not, either potential adjustments have implicitly been planned going forward or there is a shift in the business which might require a pro-forma adjustment.
  3. In a carve-out situation, understand if the entity is currently paying for the services it receives or if the expenses are recorded elsewhere
  4. Analyze if there have been any significant structural changes or if the company is planning significant changes in the future to account for these via a pro-forma adjustment

Final thoughts

These adjustments illustrate that there is not just one option as to how to interpret financials. When it comes to negotiating the price, these adjustments need to be discussed with the counterpart to have a common understanding. Identifying potential items helps understand the “true value” of the company and it helps discuss potential purchase price considerations. To understand what is atypical, a definition of how the business should normally look like is crucial. Only then, a discussion about what to pay for and what to exclude from the purchase price can be conducted.

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