NIGEL GORDON
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How to Normalise EBITDA When Buying a Business in Australia

Nigel Gordon·
module-4EBITDAbusiness-valuationbusiness-acquisitionAustralia

When you buy a small business in Australia, the price is almost always a multiple of EBITDA — earnings before interest, taxes, depreciation and amortisation. But the EBITDA a seller shows you is rarely the right starting point. Normalised EBITDA strips out one-off costs, personal expenses run through the business, and owner-specific items to reveal what the business genuinely earns under normal operating conditions. For a business selling at a 3x multiple, getting that normalised figure wrong by $100,000 means you overpay by $300,000.

That's a meaningful number. Worth understanding properly.

What is EBITDA when buying a business?

EBITDA is the standard profitability measure used to value small businesses. It represents cash earnings before accounting choices and financing decisions cloud the picture — before depreciation (a non-cash charge), before interest (which depends on how you finance the deal), and before tax (which varies by entity structure).

For trades and service businesses in Australia — plumbing, landscaping, electrical contracting, pest control — EBITDA margins typically run 15–30% of revenue, and sale multiples sit between 2x and 4x EBITDA. A plumbing business doing $2 million in revenue with $400,000 EBITDA might sell for $1–1.6 million. The multiple depends on what you're actually buying.

The problem is that an owner running a business for 15 years has had 15 years to blur the line between personal finances and business finances. Their EBITDA isn't wrong exactly. It's just theirs. Your EBITDA as the incoming owner will look different — and that difference needs to be calculated before you agree to any price.

What is normalised EBITDA?

Normalised EBITDA (sometimes called adjusted EBITDA) restates the reported profit figure by adding back or removing items that reflect the current owner's personal situation rather than the underlying economics of the business. It answers the question: if a competent arm's-length owner operated this business, what would it earn?

Two businesses with identical underlying performance can show very different reported profits depending on how the owner takes drawings, what they put through the P&L, and whether they've had any unusual events in the year. A business showing $600,000 in reported EBITDA might have $850,000 in normalised EBITDA once you strip out the personal items — or $500,000 once you account for an understated salary. You need to know which before you sign anything.

This is covered in depth in Module 4 of the Playbook, alongside the EBITDA multiples that apply to different industries and business profiles.

Common add-backs when buying a small business

Add-backs are adjustments that increase reported profit toward normalised EBITDA. Here's what you'll routinely see in Australian small business deals:

Owner's salary set above or below market. If the current owner pays themselves $350,000 when a capable replacement manager would cost $130,000, the $220,000 difference is a legitimate add-back. The reverse is just as common: an owner on $80,000 who's personally doing work that would cost $200,000 to replace. That's a downward adjustment, and sellers don't always volunteer it. A useful rule of thumb: benchmark the replacement salary against comparable management roles in your state, not what the owner says it should be.

Personal expenses through the business. Car leases, school fees, overseas trips (classified as "trade shows"), a spouse's phone, personal insurance premiums. These are standard in owner-operated businesses. For Australian small businesses, it's reasonable to expect $30,000–$80,000 in personal expenses buried in a profit and loss — more if the owner has been particularly creative. Every one needs a source document before it becomes an add-back.

One-off costs. Major repairs, legal disputes, one-time fit-outs, redundancy payments. If the business had a $90,000 legal bill settling a staff dispute last year and there's no ongoing litigation, that's a reasonable add-back. Two years of "one-off" legal bills in a row is a pattern, not a coincidence.

Related-party transactions at non-market rates. Rent paid to a property owned by a family trust, management fees to a spouse's consulting company, interest charged by a related-party lender. These need to be benchmarked to what an arm's-length party would charge. I saw an HVAC business once where the owner was charging $240,000 a year in management fees via a related trust — which conveniently dragged reported EBITDA close to zero. Strip that out, apply a market management fee, and the business looked quite different. The seller seemed surprised we noticed (which is more than most buyers bother to check).

Non-recurring revenue or costs. A large one-off contract that inflated revenue, or a government grant that won't repeat. These need to come out of the normalisation.

How to calculate normalised EBITDA: step by step

The mechanics are straightforward. The discipline is in the documentation.

  1. Start with net profit from the profit and loss statement.
  2. Add back interest, tax, depreciation and amortisation — this gives you reported EBITDA.
  3. Add back each legitimate personal expense and one-off cost. Every line needs a source document.
  4. Adjust owner's salary to market replacement cost (up or down).
  5. Adjust related-party transactions to market rates.
  6. Remove revenue that won't continue post-sale: personal client relationships that will walk out with the owner, contracts tied to the owner's individual licence or credentials.
  7. The result is normalised EBITDA.

For the full line-by-line approach, the EBITDA Normalisation Checklist is free — it walks through every common add-back category with the questions to ask and documentation to request.

Red flags in a seller's normalisation schedule

A normalisation schedule is prepared by or for the seller. Your job is to interrogate it, not ratify it. Watch for these:

Run-rate adjustments based on future contracts. "We only had $400K EBITDA but we've just signed three contracts worth another $300K so the real run rate is $700K." You're buying history. Unless those contracts are signed, started, and genuinely independent of the owner's personal relationships, don't accept run-rate revenue in the normalised figure.

EBITDA inflation through deferred maintenance. Costs pushed into next year's P&L, supplier payments slow-walked, equipment running beyond its service life. This suppresses current-year expenses and flatters EBITDA — and you inherit the deferred maintenance bill.

One-offs that recur. Check three years of accounts. An owner who had a "one-off" bad debt of $60,000 two years running doesn't have a one-off — they have a collections problem. Same logic applies to legal costs, equipment breakdowns, key staff turnover.

Revenue that leaves with the owner. Key customers who buy because of a personal relationship with the founder; professional licences held in the owner's name (relevant for electrical, plumbing, pest control businesses); government contracts requiring a nominated licensee. This isn't a normalisation issue — it's a fundamental reduction in what you're actually buying. Understanding owner dependency matters more than any add-back.

Using normalised EBITDA for valuation

Once you have a normalised EBITDA figure you trust, applying a multiple gives you an indicative price range. For Australian trades and service businesses in 2025–26:

  • 2–2.5x: distressed, high owner-dependency, no documented systems
  • 2.5–3.5x: typical owner-operated, stable revenue, some key-person risk
  • 3.5–4.5x: recurring revenue, documented processes, multiple capable staff
  • 4.5x+: strong recurring contracts, low owner-dependency, scalable operations

These ranges shift by industry — a cleaning business with recurring commercial contracts commands a different multiple to a landscaping business doing residential one-offs. For industry-specific context, see the guide to how to value a small business in Australia.

The multiple also shifts with deal structure. Paying 3.5x EBITDA on a pure cash deal is a different proposition to paying 3.5x with 30% in vendor finance — because the risk profile is different for both parties. If you're structuring a deal with vendor finance or earn-outs, the normalised EBITDA figure becomes even more important, since it's often the base for calculating deferred payments.

Verifying the normalisation as a buyer

This is where most buyers underinvest. The normalisation schedule the seller provides is a starting point for negotiation, not a finished document.

Verification means:

  • Matching every add-back claim to source documentation — bank statements, invoices, payroll records, ATO statements
  • Reviewing three years of accounts (not just the most recent) to separate genuine one-offs from patterns
  • Running an independent benchmark on the owner salary adjustment
  • Having your accountant reconstruct the EBITDA from scratch, independently, rather than just checking the seller's schedule

The financial due diligence process is where this work happens. Skipping it — or skimming it — is the single most expensive mistake buyers make.

A decent accountant for financial due diligence costs $5,000–$15,000 depending on the complexity of the business. In 20-plus years in private equity, I have never once seen that money wasted. The worst outcome is you confirm the numbers were right and you proceed with confidence. The best outcome is you find something, renegotiate, and save multiples of what you paid the accountant.

Free resource: The EBITDA Normalisation Checklist gives you a line-by-line framework for every common add-back category — with the documentation to request for each. Grab it free.

Frequently asked questions

How do you normalise EBITDA?

Start with reported net profit, add back interest, tax, depreciation and amortisation, then adjust for one-off costs, personal expenses, and above- or below-market owner salary. Every adjustment needs supporting documentation. The result is the business's sustainable earnings under normal operating conditions.

What is EBITDA when buying a business?

EBITDA is business profitability before interest, taxes, depreciation and amortisation. When buying a business, it's used as the base for applying a valuation multiple. Normalised EBITDA adjusts that figure to remove owner-specific items and one-off events.

What EBITDA multiple should I pay for a small business in Australia?

For most Australian trades and service businesses, 2.5x to 3.5x normalised EBITDA is typical. Businesses with strong recurring revenue, documented systems and low owner-dependency can justify 3.5x–4.5x. Distressed businesses or those with heavy owner-dependency often sell at 2x or below.

What's the difference between EBITDA and normalised EBITDA?

Reported EBITDA is taken directly from the financial statements. Normalised EBITDA adjusts that figure for items specific to the current owner — personal expenses, non-market salary, one-off costs, related-party transactions. The difference between the two is the gap between what the business earns for the current owner and what it will earn for you.

For more on deal structure and how normalised EBITDA feeds into broader negotiation, the Playbook walks through the full acquisition process — from initial valuation through to settlement. And if you want to follow the deals as they happen, subscribe to The Leveraged Worker — the newsletter for Australians buying and building blue-collar businesses.