Adjusted EBITDA vs EBITDA: Differences, Formula & Use Cases

Key Takeaways

• EBITDA reports what your business earned last year, while Adjusted EBITDA estimates what it will earn once a new owner takes over.
• Anyone working from your income statement arrives at the same EBITDA, but Adjusted EBITDA depends on which items the preparer decides to normalize.
• Above-market owner pay and personal expenses push Adjusted EBITDA up, and one-time income pushes it down.
• Use EBITDA to measure your own progress year over year, and Adjusted EBITDA when a buyer or lender is the one reading the number.
• Core Growth Group consults HVAC and plumbing owners through the roughly twelve-month prep that turns a shaky EBITDA into a documented Adjusted EBITDA buyers can underwrite. 

EBITDA & Adjusted EBITDA: What’s the Difference?

Both metrics measure profitability before certain deductions, but they answer different questions. EBITDA asks how the business performed. Adjusted EBITDA asks how it would perform under normal, recurring conditions, and that second question is the one a buyer needs answered before making an offer.

Those adjustments are what make EBITDA reliable enough for a buyer to price against. They remove the items that distort a single year, such as a one-time legal settlement, a government grant, or owner compensation set well above or below what a manager would cost. Without those corrections, a buyer is pricing your business off a year it will not repeat.

What Is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures a company’s core operating profitability by setting aside the effects of financing decisions, accounting methods, and tax treatment. What remains is a figure showing what the business produces from operations, independent of how it is funded or structured.

EBITDA is not a Generally Accepted Accounting Principles (GAAP) metric. GAAP neither defines it nor requires it, so companies have latitude in how they calculate and present it. That latitude is why two people can look at the same business and reach different EBITDA figures.

The EBITDA Formula

There are two common ways to calculate EBITDA.

Method 1: Net Income + Interest + Taxes + Depreciation + Amortization

Method 2: Operating Income (EBIT) + Depreciation + Amortization

Both produce the same figure when the business has no income or expenses outside its operations. Method 2 is faster when your income statement already separates operating income from everything below it. Method 1 suits most small and mid-sized businesses, since it begins at the bottom line of a standard P&L and works upward.

What Is Adjusted EBITDA?

Adjusted EBITDA takes the standard EBITDA figure and modifies it to reflect the ongoing earnings power of the business. It adds back or removes items that are non-recurring, unusual, or unrepresentative of how the company will perform under new ownership. This is the number a strategic acquirer applies a multiple to, and the same figure a lender starts from when sizing a loan.

The Adjusted EBITDA Formula

Adjusted EBITDA = EBITDA ± Adjustments

Adjustments move in either direction, adding back expenses that will not recur or removing income that will not repeat. Add-backs you can document survive diligence. Anything you cannot support gets removed, and the price moves with it.

Common adjustments include:

• Owner compensation above market rate: The excess gets added back, since a buyer will pay a manager the going rate instead.
• Owner compensation below market rate: This works in reverse. An owner paying themselves less than a replacement manager would cost sees the difference deducted, which lowers Adjusted EBITDA.
• One-time legal or consulting fees: Professional expenses tied to a single matter that will not continue after closing.
• Personal expenses charged to the business: Vehicle costs and owner-specific perks. Travel and meals are commonly challenged, so keep documentation showing which portion was personal.
• Family members on payroll above market rate: The amount above what the role would pay someone else.
• Rent that differs from market rate: Common when the owner also owns the building, and it can adjust in either direction.

Adjusted EBITDA vs EBITDA: A Direct Comparison

How the Numbers Differ on the Same Income Statement

EBITDA follows a formula. Take the income statement, add back interest, taxes, depreciation, and amortization, and the figure comes out the same regardless of who runs the calculation.

Adjusted EBITDA requires judgment. Someone has to decide which expenses are non-recurring and how to normalize owner-related costs. Two people can reach different answers on the same set of books.

Adjustments also work against the seller. A buyer commissioning a quality of earnings review looks for one-time revenue events and inflated margins that belong outside the earnings baseline, alongside the add-backs that raise it. Reviewing your own numbers with a CPA before a buyer’s team arrives is what keeps that process from producing surprises.

Operating Performance & Normalized Earnings

EBITDA is the right tool when you want to compare operating performance across companies or time periods without accounting noise. Adjusted EBITDA is the right tool when you want to show what the business will actually earn going forward. It’s normalized for owner-specific costs and one-time events.

For internal benchmarking, EBITDA is clean and consistent. For external transactions, Adjusted EBITDA is the metric that gets deals done.

Consistency & Flexibility

The tradeoff is clear: EBITDA gives you consistency, while Adjusted EBITDA gives you accuracy in the context of a transaction. Neither is inherently superior. It depends entirely on the use case.

For business owners, the practical takeaway is this: your accountant can calculate EBITDA from your statements, though no statement reports it directly.

But when it’s time to sell, your advisor will rebuild that number from the ground up using Adjusted EBITDA methodology. Those two figures can look very different, and the one your buyer sees first sets the anchor for your entire negotiation.

When to Use EBITDA vs Adjusted EBITDA

The choice comes down to who is reading the number. EBITDA suits comparison, so use it when tracking your own performance year over year or measuring your company against others in the trade. Because every company calculates it the same way, it produces a fair basis for that kind of comparison.

Adjusted EBITDA suits a transaction. Use it when you present your business to a buyer or take your financials to a lender for acquisition financing. It applies specifically when the owner is deeply involved in operations, when one-time expenses appear in recent years, or when owner compensation runs above or below what a manager would cost. Those items distort EBITDA, and a buyer will normalize them regardless of what you present.

Adjusted EBITDA vs EBITDA at a Glance

Factor	EBITDA	Adjusted EBITDA
Definition	Operating earnings before interest, taxes, depreciation, and amortization	EBITDA normalized for owner costs and non-recurring items
Formula	Net Income + Interest + Taxes + Depreciation + Amortization	EBITDA ± Adjustments
Calculation method	Standardized formula	Requires judgment
Consistency	Same result for any preparer	Varies by preparer
Owner compensation	Recorded as paid	Normalized to market rate
Non-recurring items	Included	Removed
Primary use	Performance tracking and benchmarking	Transactions and financing
Primary audience	Owner and accountant	Buyers and lenders
Documentation required	None beyond the financials	Support for every adjustment

Prepare Your Numbers for a Buyer With Core Growth Group

EBITDA tells you what your business earns today, and Adjusted EBITDA tells a buyer what it will earn once you step away. The difference is owner pay, one-time expenses, and items a buyer will normalize no matter what you present, so the version they see first sets your price.

At Core Growth Group, we prepare HVAC and plumbing owners for sale through the financial cleanup, documentation, and stress testing that turn raw EBITDA into a figure a buyer will pay for, usually across about twelve months. We know which add-backs survive because we buy service businesses ourselves, and we also work with owners on growing or exiting when that is the stage they are in. Contact us to find out what your books would show a buyer.

Frequently Asked Questions (FAQs)

Is Adjusted EBITDA always higher than EBITDA?

Usually higher, but not always. It rises when a buyer adds back owner pay above market rate, personal expenses charged to the company, or costs that will not happen again. It falls when the business had income that will not repeat, or when the owner has been paying themselves less than a manager would cost.

Is EBITDA a GAAP metric?

No. EBITDA is a non-GAAP measure, neither defined nor required under Generally Accepted Accounting Principles. Public companies reporting it must reconcile it to net income for the SEC, while private companies face no such requirement, so the quality of EBITDA reporting varies from one business to the next.

Can a company define its own Adjusted EBITDA?

Yes, which is why buyers examine it closely. Adjusted EBITDA has no GAAP definition, so a seller could label a recurring cost as non-recurring to lift the number. Buyers commission independent quality of earnings reviews for that reason, and every adjustment needs documentation tied to specific line items.

What is a good Adjusted EBITDA margin?

Adjusted EBITDA margin is Adjusted EBITDA divided by revenue. What qualifies as good varies by industry, so the useful comparison is against other companies in your trade instead of against a general figure. Buyers also weigh the direction it has moved over recent years.

Why Choose Core Growth Group Over a Private Equity Process?

Core Growth Group is the buyer, so a qualified deal reaches us without a listing process in between. We run a plumbing company of our own, so the operation you are selling is one we already understand from the inside. Owners who do not fit our criteria can still work with us to grow the business or prepare it for a future sale.

 

*Disclaimer: This content is for informational purposes only and should not be considered business, financial, legal, or tax advice. Results vary based on market conditions and individual business circumstances. To learn more about scaling, preparing, or exiting your business, visit Core Growth Group.