What Is Normalised EBITDA in an Accounting Practice Acquisition?

When buying an accounting practice, the EBITDA shown in the financial statements or Information Memorandum is not necessarily the figure a lender will use to assess the acquisition.

Banks and specialist business lenders are generally more interested in normalised EBITDA . This is an estimate of the sustainable earnings the practice is expected to generate under normal operating conditions after the acquisition.

This distinction can materially affect both borrowing capacity and the lender’s view of the purchase price.

What Does Normalised EBITDA Mean?

EBITDA stands for earnings before interest, tax, depreciation and amortisation.

Normalised EBITDA takes that figure and adjusts it for income or expenses that may not reflect the ongoing economics of the accounting practice.

The objective is relatively simple:

What earnings should this practice reasonably generate for the buyer on an ongoing basis?

For an accounting-practice acquisition, that question is particularly important because the vendor may personally perform significant client work, receive remuneration in an unusual way, own the premises, employ family members or incur expenses that will change after settlement.

What Adjustments Can Be Made to EBITDA?

There is no universal formula. Different lenders may approach normalisation differently depending on the business and transaction.

Common areas considered include:

Principal or Owner Remuneration

This is often one of the most important adjustments.

Suppose an accounting practice reports EBITDA of $800,000, but the vendor works full-time in the business and does not receive a normal market salary through the profit and loss statement.

If replacing that principal would cost $250,000 per year, the sustainable earnings may be closer to $550,000 before considering other adjustments.

This is why buyers should establish whether the stated EBITDA already allows for an appropriate commercial salary for the working principals.

One-Off Expenses

Certain expenses may legitimately be added back if they are genuinely non-recurring.

Examples could include:

• unusual legal expenses

• one-off consulting costs

• relocation expenses

• exceptional recruitment costs.

However, buyers should be cautious about accepting every vendor adjustment at face value. An expense described as “one-off” may actually recur.

One-Off or Unsustainable Income

Normalisation can work in the opposite direction.

A practice may have benefited from an unusually large consulting assignment, temporary project or other income that is unlikely to continue after settlement.

A lender may remove that revenue when assessing sustainable earnings.

Related-Party Expenses

Rent, salaries and other expenses involving related parties may need to be adjusted to commercial market levels.

For example, if the vendor owns the office premises and the practice pays below-market rent, the buyer’s future occupancy cost may be higher than the historical accounts suggest.

Staffing Requirements

A practice may appear highly profitable because the vendor is carrying a significant workload personally or because an important position is temporarily vacant.

If additional staff will be required following the acquisition, those costs may need to be reflected in normalised earnings.

Why Does Normalised EBITDA Matter for Finance?

For many accounting-practice acquisitions, lenders are assessing a business with relatively few tangible assets.

The strength of the lending proposition therefore depends heavily on:

• recurring fee revenue

• sustainable profitability

• client retention

• management capability

• the practice’s ability to service acquisition debt.

A lender may use normalised EBITDA when determining how much debt the combined business can reasonably support.

This means two practices with identical revenue can have very different borrowing capacities.

For example:

Practice A

Revenue: $2 million Normalised EBITDA: $700,000

Practice B

Revenue: $2 million Normalised EBITDA: $350,000

The headline revenue is identical, but the ability to service acquisition debt is substantially different.

Normalised EBITDA and Valuation

Normalised EBITDA is not only relevant to the bank.

It can also help a buyer assess whether the vendor’s asking price is commercially reasonable.

If a practice is offered for $2.4 million and generates $600,000 of sustainable earnings, the buyer is effectively paying around four times normalised EBITDA.

But if closer analysis shows sustainable EBITDA is only $400,000, the same $2.4 million price represents six times earnings.

That difference may materially change the attractiveness of the acquisition.

What Should Buyers Ask For?

Before relying on an EBITDA figure, buyers should understand how it has been calculated.

Useful information can include:

• three years of financial statements

• current year-to-date accounts

• principal remuneration

• staff costs and vacancies

• related-party expenses

• details of EBITDA add-backs

• unusual or non-recurring revenue

• expected changes after the vendor exits.

The objective is not simply to determine what the practice earned historically.

It is to understand what the business is likely to earn after you own it.

Considering Buying an Accounting Practice?

The reported EBITDA in a sale memorandum may not be the same figure a lender ultimately relies on.

Fairlane Finance can help you assess how lenders may view the practice’s recurring revenue, normalised earnings, purchase price and proposed funding structure before you commit to an acquisition.

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Fairlane Finance can help you assess how lenders may view the practice’s recurring revenue, normalised earnings, purchase price and proposed funding structure before you commit to the acquisition.

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General information only. Seek appropriate legal, accounting and tax advice. Lending criteria vary.