What EBITDA adjustments are common in agency transactions?

EBITDA Adjustments in Agency Transactions

EBITDA adjustments, also known as 'add-backs' or 'normalising adjustments,' form the technical foundation of agency valuations. However, they remain among the most contested elements of M&A negotiations. Understanding which adjustments are defensible, market-standard, and likely to survive buyer scrutiny is essential for maximising valuation and avoiding post-closing disputes.

EBITDA adjustments serve a critical purpose: they bridge the gap between reported accounting earnings—navigating differences between IFRS vs GAAP standards—and the normalised sustainable earnings available to support buyer debt and generate returns. Without adjustments, reported EBITDA may be depressed by owner-specific expenses or one-time items that will not recur post-acquisition. Conversely, aggressive add-backs that are not truly non-recurring can trigger buyer scepticism and valuation haircuts.

Common Adjustment Categories

Owner/Founder Remuneration

The most prevalent and defensible EBITDA adjustment in agency transactions addresses owner or founder remuneration. Owner salaries often diverge significantly from market rates. They may be inflated to reduce taxes through discretionary bonus structures, or artificially depressed if owners pay themselves modestly while extracting value through dividends or benefits. The appropriate adjustment calculates the difference between current owner compensation (often recorded as Director’s Emoluments) and the third-party market salary for equivalent responsibilities. This process is similar to calculating SDE (Seller’s Discretionary Earnings), though M&A transactions typically focus on a fully-costed EBITDA model (see our M&A insights for more on this process). For example, if a founder-CEO currently draws £150,000 plus an £80,000 discretionary bonus, but a professional CEO replacement would cost £200,000, the add-back is £30,000 (the £80,000 bonus minus the £50,000 incremental replacement cost). This approach preserves buyer certainty that the business can support management at market rates.

Family Member Compensation

Family member compensation represents another standard add-back category. Payments to spouses, adult children, or other relatives who are not genuinely required employees are typically adjusted entirely. However, if a family member is a legitimate employee providing real value, their salary generally requires no adjustment unless they are departing with the founder's exit.

One-Time, Non-Recurring Business Expenses

One-time, non-recurring business expenses constitute a second major adjustment category. These include litigation settlements, severance for redundant personnel, exceptional professional fees (such as for transaction advisors or restructuring consultants), or unusual insurance claims. The critical test is whether a buyer would expect these expenses to recur in normal operations. One-time customer acquisition costs, extraordinary recruitment fees, or cyber-incident remediation might qualify, while ongoing professional services typically do not.

Capital Expenditures and Technology Investments

Capital expenditures and technology investments present more nuanced territory. Some buyers accept add-backs for extraordinary technology implementation costs (such as major systems migration, cloud platform transitions, or proprietary tool development) that will not recur. However, routine maintenance capital expenditure, IT infrastructure refresh, and software licensing are generally not adjusted, as post-acquisition buyers will incur these regardless.

Related-Party Transactions

Related-party transactions warrant careful examination. If the agency pays above-market rents to properties owned by founders, incurs over-market vendor costs with founder-controlled suppliers, or pays excessive management fees to parent companies, buyers will adjust these to arm's-length market rates. These adjustments reduce reported EBITDA rather than add back to it.

Marketing and Business Development Spend

Marketing and business development spend occasionally receives scrutiny. If the agency has conducted unusual marketing campaigns or acquisition targeting that will not continue post-acquisition, buyers may negotiate adjustments. However, routine selling expenses and normal marketing costs are typically not adjusted.

Consulting and Professional Fees

Consulting and professional fees for transaction advisors, attorneys, and accountants involved in the sale process are non-recurring and typically added back. However, buyers increasingly resist add-backs for general consulting fees, arguing that agencies require ongoing professional support.

Documentation and Market Evolution

Critical to successful adjustment negotiation is documentation and defensibility. For each proposed add-back, gather evidence, such as salary market studies for compensation adjustments, supporting documentation for one-time expenses, and clear explanations for non-recurrence. Buyers will audit adjustments with scepticism, so vague or unsupported claims trigger valuation discounts. Industry research suggests agencies using rigorous, well-documented adjustment schedules achieve 5-15% better valuations than those proposing speculative add-backs.

Recent market evolution shows buyers becoming more conservative on adjustments in 2025-2026. Economic uncertainty, integration challenges from prior acquisitions, and heightened seller accountability have created buyer discipline around add-back acceptance. Adjustments that would not have triggered discussion three years ago now require detailed justification.

For sellers, the strategic approach involves preparing clean historical financials with minimal non-recurring items, rather than relying on aggressive add-backs. Buyers value stability and predictability more than high absolute EBITDA numbers supported by aggressive adjustments. An agency demonstrating £1m normalised EBITDA achieved without material add-backs may command better terms than one claiming £1.2m through aggressive adjustments.