Every SME owner has a number in mind when they think about selling their business. That number usually comes from a simple calculation: my EBITDA multiplied by a reasonable multiple. The problem is that the buyer isn't going to use your EBITDA. They're going to use theirs.
Before putting an offer on the table, a serious buyer — whether a private equity fund, a family office, or a strategic buyer — commissions what M&A professionals call a quality of earnings (QoE) report. In essence, an external team rebuilds your income statement to calculate how much the company would earn if it weren't yours, stripping out everything that is non-recurring, everything that isn't at market rates, and everything that wouldn't transfer to the new owner.
The result of that exercise is called normalized EBITDA. And it's the figure on which the deal price is calculated.
What “normalizing” EBITDA means
Normalizing EBITDA doesn't mean correcting it or inflating it. It means cleaning it of everything that distorts the business's real, sustainable operating profitability, to arrive at a figure that reflects what a third party can expect to earn from the company once it changes hands.
The accounts of a founder-run SME include decisions that are perfectly legal and reasonable from a tax and operational standpoint, but that don't reflect the market conditions a new owner would operate under. Those differences, when added up and multiplied by a multiple of 4x to 7x, can move the deal price by hundreds of thousands of euros in one direction or the other.
The most common adjustments
Every company has its own particularities, but there's a set of adjustments that appears in virtually every quality of earnings report for Spanish SMEs.
Founder's personal expenses run through the company. The car, trips that combine business and leisure, meals, personal insurance, training unrelated to the business — all of this reduces book EBITDA, but none of it is an expense the new owner will keep. The buyer removes them. EBITDA goes up.
The founder's salary, if it's below market. Many SME owners pay themselves a modest salary and make up for it with dividends, because it's more tax-efficient. The buyer can't do that: they'll need to hire a professional managing director or CEO at market rates. If the founder pays themselves €40,000 and an equivalent executive would cost €120,000, the buyer adjusts for that €80,000 difference. EBITDA goes down.
Related-party leases. If the company operates out of a warehouse or premises owned by the founder's holding company and pays below-market rent, the buyer replaces that figure with the equivalent market rent. If the warehouse is rented at €3,000/month and the market rate is €5,500, the annual difference of €30,000 is subtracted from EBITDA. EBITDA goes down.
Non-recurring income or expenses. An extraordinary grant, a lawsuit that generated unusual income, a one-time restructuring cost, an unusually large severance payment, a failed project that won't be repeated. The buyer removes everything that isn't part of the business's normal operating rhythm. EBITDA can go up or down, depending on whether the unusual event was positive or negative.
Expenses that will disappear with the deal. If the buyer already has centralized functions — accounting, human resources, IT systems — and will integrate the company into its structure, certain expenses of the target company will cease to exist. Those savings are called synergies, and the buyer builds them into its model, though it doesn't necessarily share them with the seller in the price.
Contracts or customers at risk of non-renewal. If a major contract expires in the coming months with no guarantee of renewal, or if a key customer has a personal relationship with the founder that might not transfer, the buyer may adjust downward the recurring revenue attributable to those lines.
Why the multiple amplifies every adjustment
Here's why these adjustments matter so much: in M&A, the price is calculated by multiplying normalized EBITDA by a multiple. If the multiple is 5x, every euro of EBITDA adjustment moves the price by 5 euros.
A founder's salary that is €80,000 below market doesn't reduce the price by €80,000. It reduces it by 80,000 × 5 = €400,000. A related-party lease that is €30,000 below market doesn't reduce the price by €30,000. It reduces it by €150,000. And the other way around: €50,000 in personal expenses that the buyer removes doesn't raise the price by €50,000, but by €250,000.
That's the mechanism that makes normalized EBITDA — not book EBITDA — the figure that determines the price. The multiple is negotiated; the adjustments are proven. A seller can argue whether the fair multiple is 4.5x or 5.5x, but can hardly argue that their salary is at market or that the warehouse rent isn't below it. Adjustments are factual, and that's why they move the price more than the entire multiple negotiation.
If you want to understand in detail how enterprise value works and how you get from EBITDA to the final price, we've published a complete guide with the formula and a step-by-step example.
Adjustments that raise EBITDA and adjustments that lower it
Normalized EBITDA isn't always lower than book EBITDA. It depends on the founder's profile and how they run the company.
In SMEs where the owner runs many personal expenses through the company, doesn't pay themselves a high salary, and has no related-party debt, normalized EBITDA is usually higher than book EBITDA. The buyer strips out those expenses and finds a more profitable business than the accounts suggest.
In SMEs where the owner pays themselves little but the company leases assets from their holding company at a low price, where there are contracts at risk due to founder dependency, or where part of the revenue depends on non-transferable personal relationships, normalized EBITDA is usually lower. The buyer sees a business that will cost more than the accounts show once it has to operate without the founder.
The usual case is a combination of both. Some adjustments add, others subtract. The net result can be a surprise — positive or negative — and the seller should know it before the buyer discovers it.
How to anticipate it before you sit down to negotiate
The most practical recommendation is to do the exercise internally before the buyer does. You don't need to commission a formal QoE — just take the income statement for the last 3 fiscal years and review it honestly.
First, identify all the expenses that belong to the founder, not the company. Everything that wouldn't exist if the company were run by a professional third party.
Second, calculate how much it would cost to replace the founder with a market-rate executive. If you pay yourself €50,000 today and an equivalent executive would cost €130,000, the €80,000 difference is a downward adjustment the buyer will make.
Third, review all contracts with related parties — leases, services, loans — and compare them with the equivalent market price.
Fourth, remove everything non-recurring from the income statement. Grants, lawsuits, one-off projects, extraordinary expenses.
What's left after those four steps is a reasonable approximation of your normalized EBITDA. That's the figure the buyer will use to calculate their offer. If you know it before starting the process, you negotiate from a much stronger position — because you know exactly what the buyer will see when they look at your accounts.
To understand the full analysis a buyer performs on your accounts, see our guide to financial due diligence and, if you're in the early stages, the 6 keys to preparing your SME before meeting with buyers.
