Your EBITDA and the Buyer’s EBITDA are rarely the same. Why?

Introduction: Why your EBITDA and the buyer’s EBITDA are rarely the same

In many transactions, promoters are surprised when the buyer’s team presents an EBITDA number that is lower or different from what the business has been using internally. The financial statements are audited, MIS is reviewed every month, and still, the buyer’s view of EBITDA is not the same.

This difference does not automatically mean something is wrong. It usually means the buyer has applied a different lens: they have used multi‑year MIS to adjust for one‑off items, timing effects, under‑stated expenses, and risks that affect the quality and repeatability of earnings. The more prepared your MIS is for this review, the more control you have over how your EBITDA is refined—and how your business is valued.

1. Why buyers refine EBITDA instead of accepting it “as is”

For a buyer, EBITDA is not just a number, it is a starting point. They want EBITDA that is:

• normal (no unusual spikes or dips),
• sustainable (can continue after the deal),
• and fairly stated (no major distortions).

To get there, buyers use your MIS to answer questions such as:

• Are there one‑time revenues or costs that should be excluded from “normal” performance?
• Have any recurring expenses been cut back temporarily around the deal period?
• Are there owner‑related items, informal benefits, or related‑party charges that need to be adjusted to market levels?

All these decisions come from patterns in MIS, not just the latest audited P&L.

2. Using MIS to identify one‑off and non‑recurring items

The first refinement buyers usually make is separating recurring from non‑recurring earnings. MIS helps them see this across months and years.

Examples of non‑recurring items that buyers may adjust for:

• A large contract that is clearly one‑time and not expected to repeat.
• Exceptional income (such as asset sale gains, one‑off subsidies, or settlements).
• Exceptional costs (such as a litigation expense, one‑time restructuring cost, or major write‑off).

If MIS clearly tags such items and shows their impact separately, you can:

• remove negative one‑offs (to increase normalised EBITDA), and
• remove positive one‑offs (so the buyer does not believe you are overstating performance).

When this work is not done in advance, the buyer’s team will do it themselves. They may take a more conservative approach than you would have taken if you had defined “normal” using your MIS first.

3. MIS and under‑stated or shifted expenses

In the year(s) before a transaction, some businesses unintentionally (or sometimes intentionally) create patterns that buyers pick up through MIS:

• Marketing, R&D, or maintenance spend is lower than historical levels.
• Hiring is delayed or key positions remain vacant, temporarily improving margins.
• Certain recurring costs are capitalised or booked under unusual heads.

When a buyer’s team sees these trends in MIS, they often:

• rebuild a “steady‑state” cost structure based on 2–3 years of data,
• increase certain expense lines to a more realistic level, and
• reduce the EBITDA used for valuation.

Well‑designed MIS helps you stay ahead of this:

• If you know an expense has been temporarily reduced, you can already present a normalised EBITDA that reflects the cost at its long‑term level.
• If you maintain consistent coding and clear cost categories, it becomes easier to explain why certain changes in expense levels are structural and not just temporary.

4. Related‑party and owner‑linked items: what MIS should show clearly

Many businesses have some level of owner‑linked or related‑party transactions:

• Rent paid to a promoter‑owned property.
• Salaries to family members involved in management.
• Personal expenses occasionally routed through the business.

Buyers are not automatically against such arrangements. They just want to know:

• what the true market equivalents would be, and
• how EBITDA would look under those conditions.

If MIS (and ledgers) clearly identify:

• related‑party rentals and their terms,
• roles and compensation of family members,
• identifiable personal expenses that can be removed,

then you can take the initiative:

• demonstrate what EBITDA looks like after removing personal costs, and
• what EBITDA looks like if related‑party items are brought to fair market levels.

This often leads to a more balanced discussion rather than a buyer unilaterally making assumptions.

5. Using MIS trends to support “normal” EBITDA instead of one lucky year

Another common refinement is dealing with a “peak year”. Sometimes the latest year looks very strong compared to earlier years:

• higher revenue growth,
• higher margins,
• unusual cost efficiency.

Buyers will usually not accept only the latest year; they use MIS trends over 3–4 years to define a normalised or run‑rate EBITDA.

If your MIS can show:

• why recent improvements are structural (for example, pricing changes, product mix shift, process improvements), and
• how those improvements have built up over several quarters,

then you can argue for a normalised EBITDA closer to the latest performance.

If MIS does not support the story, buyers may take an average of past years or discount the recent improvement, leading to a lower normalised EBITDA than you expect.

6. Connecting EBITDA refinement with working‑capital patterns

Even when EBITDA is accepted after normalisation, buyers also look at how that EBITDA behaves with working capital. MIS on debtors, inventory, and creditors is crucial here.

For example:

• If MIS shows EBITDA growth but debtor days are increasing sharply, buyers may feel the quality of earnings is weaker and adjust valuation or deal structure (retentions, tighter closing working‑capital targets).
• If MIS shows inventory build‑up in slow‑moving items, they may treat part of stock as effectively non‑earning and factor that into discussions.

While this does not always change EBITDA directly, it affects how comfortable buyers feel with the number, and whether they believe it can truly translate into cash. MIS that explains these patterns clearly can protect both the EBITDA number and the terms linked to working capital.

7. How to prepare your MIS so EBITDA refinement is a joint exercise, not a surprise

You cannot stop buyers from refining EBITDA; it is their responsibility to do so. But you can decide whether that refinement:

• happens with you, using your MIS and explanations, or
• happens without you, based only on their interpretation of your data.

To stay on the front foot, consider:

• Reviewing the last 3–4 years of MIS yourself as if you were the buyer.
• Preparing your own normalised EBITDA view by clearly separating:
  • recurring vs non‑recurring items,
  • structural vs temporary cost changes,
  • related‑party items and personal adjustments.
• Ensuring your MIS can quickly produce:
  • month‑wise and segment‑wise revenue and margin,
  • clear expense categories with consistent coding,
  • supporting schedules for major adjustments.

When this groundwork is done, the conversation with buyers shifts. Instead of defending a single number, you sit on the same side of the table, working through a transparent bridge from reported EBITDA to a normalised, sustainable figure both sides can rely on.

Conclusion: Using MIS to make your EBITDA more credible, not just higher

The goal is not to “push” the highest possible EBITDA, but to present an EBITDA that is:

• clearly explained,
• supported by MIS patterns, and
• credible for both sides.

When your MIS is designed with this mindset, buyers will still refine EBITDA—but the gap between your view and theirs reduces. More importantly, the refinement process becomes collaborative and data‑driven, rather than reactive and uncomfortable.

Thinking this way also improves internal management: once you start looking at your own numbers as a buyer would—adjusting for one‑offs, checking trends, and testing sustainability—you gain a sharper understanding of your business long before any due diligence begins.

LinkedIn Link : RMPS Profile

Prepare by : Labh Modhiya www.linkedin.com/in/labh-modhiya-594644242

This article is only a knowledge-sharing initiative and is based on the Relevant Provisions as applicable and as per the information existing at the time of the preparation. In no event, RMPS & Co. or the Author or any other persons be liable for any direct and indirect result from this Article or any inadvertent omission of the provisions, update, etc if any.

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