How Buyers Recast Your EBITDA, And Why the Number Is Often Lower Than You Expect

There's a number most business owners have in their head when they think about selling. It usually comes from multiplying their profit by something that sounds reasonable, a multiple they heard from a mate, saw in an industry article, or got from a broker who was trying to win their mandate. And almost universally, that number is higher than what a buyer will actually pay.

The reason isn't that buyers are unreasonable. It's that they're starting from a different profit figure. Before any offer is made, before any multiple is applied,every serious acquirer in Australia goes through a process called recasting, also known as normalising or adjusting EBITDA. Understanding this process, and knowing what it will do to your numbers, is arguably the most important thing you can do before you take your business to market.

What recasting actually means

EBITDA stands for earnings before interest, tax, depreciation, and amortisation. It's the starting point for most business valuations in Australia because it approximates operating cash flow, what the business generates before financing decisions and non-cash accounting items cloud the picture.

But raw EBITDA from your P&L is not what buyers value. They value adjusted or normalised EBITDA, the earnings the business would generate if it were run by a professional owner at arm's length, without personal expenses mixed in, without above-market owner salaries, and without one-off items distorting the true run-rate of the business.

Recasting is the process of arriving at that adjusted number. It involves two types of adjustments: items that get stripped out (things that inflated or distorted the reported profit in the seller's favour) and genuine items that get added back (real one-off costs that won't recur and therefore shouldn't penalise the valuation).

The net result of this process, in many Australian SME transactions,is that the adjusted EBITDA a buyer works from is meaningfully lower than the profit figure on your P&L. How much lower? In our experience across Australian SME sales, typically in the range of 15–35%, though this varies significantly depending on how the business has been structured and managed.

What buyers strip OUT of your EBITDA

These are the adjustments that reduce the adjusted EBITDA relative to your reported profit. They happen because buyers are not buying your lifestyle. They're buying the earnings power of the business going forward.

Owner salary above market rate

This is the single largest recast item in most SME businesses. If you're paying yourself $300,000 and a competent general manager doing your job would cost $160,000, a buyer will treat $140,000 of your salary as an above-market owner benefit, and they will reduce their adjusted EBITDA by that amount.

This surprises many owners who assume that because they "added back" their full salary to show buyers a high EBITDA, buyers will accept that framing. They won't. Buyers need to replace you with someone. The cost of that replacement manager gets deducted from the adjusted EBITDA. What doesn't get deducted is the difference between what you pay yourself and what that replacement would cost, and that gap is often smaller than owners expect.

To assess the right market rate, buyers typically benchmark against ATO salary data, industry surveys, and what similar businesses in the sector pay for equivalent management roles.

Personal expenses run through the business

This is common across Australian SMEs and perfectly legal from a tax minimisation standpoint, but it directly reduces your adjusted EBITDA in a buyer's recast. Common items include:

• Motor vehicles: A car run through the business that has personal use. Buyers will assess what portion is genuinely business and strip the rest. For a fully-maintained $100,000 vehicle with mixed use, the personal component might be $12,000–$18,000 annually.
• Travel: Business trips that include personal holidays, or entertainment expenses with a personal component. Hard to prove either way, which is exactly why buyers discount or remove them.
• Phone, internet, subscriptions: Usually modest in isolation, but they add up when combined with other items.
• Income protection and life insurance: Personal insurance premiums paid by the business are stripped out entirely.
• Family wages: If a spouse or family member is employed at above-market rates for the role they actually perform, the excess is stripped. If they're employed at market rates and doing genuine work, no adjustment.
• Home office and related expenses: Sometimes claimed against the business, sometimes legitimate. Buyers who see these will at minimum ask for substantiation.

Related-party rent at above-market rates

If you own the property your business operates from and the business pays rent to you (or your SMSF) at above-market rates, buyers will normalise that rent to market. The business's EBITDA will be adjusted downward by the above-market premium.

The reverse is also true: if you're charging below-market rent because you control both sides of the transaction, a buyer will add the market rent shortfall back in, because once they acquire the business, they'll need to pay a third-party landlord at market rates.

Owner-specific revenue that won't transfer

If a material portion of revenue comes from the owner's personal relationships, and those relationships are genuinely at risk of walking when you sell, buyers will either haircut that revenue or heavily discount the valuation. This is the owner dependency problem, and it hits the multiple, not just the EBITDA.

What buyers genuinely ADD BACK

Recasting is not purely punitive. Buyers also add back genuine one-off costs that reduced your historical EBITDA but won't recur. These adjustments work in your favour, and they're where having proper documentation makes a significant difference.

Non-recurring legal and professional fees

A dispute with a former employee that cost $80,000 in legal fees and is now fully resolved. A patent filing that cost $45,000 and is a one-time expense. These get added back because they have no bearing on what the business will earn going forward. The key word is non-recurring, buyers will scrutinise whether you're classifying recurring operational costs as one-offs.

COVID disruption years

For businesses that suffered demonstrable revenue or cost disruption during 2020 and 2021, buyers, particularly those using a weighted average EBITDA approach,may give partial or full credit for those years, or weight them less heavily in a trailing average. This isn't automatic, and it requires substantiation. But sophisticated buyers don't want to penalise a structurally sound business for a once-in-a-generation event.

Capital expenditure that's now complete

If you invested heavily in new equipment, a fit-out, or a system implementation in a prior year, and that investment is now complete and won't be repeated at the same level, buyers may add back the one-time component. This is more nuanced and requires detailed discussion, but it's a legitimate addback claim when properly documented.

Transitional costs

Redundancy costs from a restructure that's now complete, relocation costs following a one-time premises change, or costs associated with exiting an unprofitable contract, these are all potentially addback candidates if they're genuinely non-recurring and you have the documentation to prove it.

The worked example: $800K profit becomes a $2.79M valuation

Here's how this plays out in practice. A business owner has a manufacturing services business in Queensland. Their accountant-prepared P&L shows $800,000 in profit before tax. They've heard that businesses like theirs trade at around 4.5× EBITDA. Their mental model: $800,000 × 4.5 = $3.6M.

Note: the 4.5× multiple used here is illustrative, the same multiple the owner is already using in their head. In practice, applicable multiples vary substantially by industry, EBITDA size, business quality, and buyer type. A $620K EBITDA manufacturing services business may trade at 3.5–5× depending on these factors. The point of this example is to isolate the impact of the recast itself, independent of the multiple discussion.

A buyer's recast tells a different story.

Item	Adjustment	Running total
Reported profit (pre-tax, pre-interest)	-	$800,000
Owner salary: $280K paid, $160K market rate, strip excess	−$120,000	$680,000
Personal vehicle (two vehicles, 60% personal use estimate)	−$22,000	$658,000
Family wages: spouse on payroll at above-market rate	−$30,000	$628,000
Related-party rent: $180K/yr paid vs $172K market, strip premium	−$8,000	$620,000
One-off legal dispute (fully resolved, documented)	+$45,000	$665,000
COVID year anomaly: buyer partially discounts, uses 3-yr weighted avg	−$45,000	$620,000
Adjusted EBITDA	-	$620,000

The adjusted EBITDA is $620,000, 22.5% below the reported profit of $800,000. At the same 4.5× multiple the owner was using in their head:

• Owner's expectation: $800,000 × 4.5 = $3,600,000
• Buyer's offer: $620,000 × 4.5 = $2,790,000

The gap is $810,000, before any discussion about multiple, deal structure, earnouts, or deferred consideration. And none of this involves bad faith on the buyer's part. They've simply done what every acquirer does.

Now, if the multiple also gets compressed, because revenue is lumpy, because the owner runs all the key relationships, or because the financials are informal,the gap widens further. A 3.5× multiple on $620K adjusted EBITDA gives $2.17M. That's a $1.43M gap from the owner's expectation.

Why the gap commonly falls in the 15–35% range

The recast gap, the difference between owner-reported profit and buyer-adjusted EBITDA,is not random. It's structurally predictable, for a simple reason: most Australian SME owners have spent years optimising their business for tax minimisation, not for saleability. Those objectives are directly opposed to each other.

Tax minimisation means running as many legitimate deductions as possible through the business, keeping the reported taxable profit low, and using the business entity as an efficient vehicle for personal expenses where permissible. It works exactly as intended for as long as you're running the business. But every dollar of expense run through the business, legitimate from a tax perspective,is a potential deduction from your adjusted EBITDA in a buyer's recast.

The 15–35% range reflects the typical spread of how aggressively owners have managed this. A business with modest personal expenses, a market-rate owner salary, and clean records might experience a 10–15% recast gap. A business with two vehicles, family wages, above-market owner salary, and informal expense management might experience 30–40%.

None of this means the owner did anything wrong. It means the financial statements were optimised for a different objective. Buyers know this. They expect it. They've built the recasting process precisely because it's universal.

What you can do right now to reduce the gap

If you're planning to sell in the next two to three years, the most valuable work you can do is not finding a broker. It's closing the gap between your reported profit and your adjusted EBITDA. Here's how.

Pay yourself a proper market-rate salary

This sounds counterintuitive. You'll pay more tax in the short term. But if your current salary is significantly above market, you're effectively hiding earnings in compensation. Bringing your salary to market rate, and letting that additional profit flow through as EBITDA, both cleans the recast and increases your adjusted earnings. Start this process two to three years before you intend to sell so the clean salary structure appears across at least two full financial years.

Stop running personal expenses through the business

Again. You'll give up the tax deductions. But if you're planning to sell in the near term, the value of clean financials substantially outweighs the tax saving. Run a full audit of your current expenses: which ones have a personal component? Which vehicles, memberships, travel items, or insurance policies would a buyer flag? Remove them cleanly, and let the true profitability of the business show.

Document everything you want to claim as a legitimate addback

For every genuine one-off cost in your prior two to three years of financials, the legal dispute, the one-time equipment write-off, the COVID disruption,create a clean document trail. Invoice, context, and clear explanation of why it won't recur. Buyers who see well-documented addback claims treat them differently from unsupported verbal assertions. The former gets accepted; the latter gets discounted or ignored.

Get your recast done before you list

The single most practical step is to have someone run your recast before you go to market. Not a broker who wants your listing, and not your accountant who prepared the original P&L, someone who will look at your financials the way a buyer would, identify every item that will get stripped or questioned, and give you an honest view of what your adjusted EBITDA actually is. Then you decide how to respond to that number. That's preparation. Everything else is hope.

Understanding what your business is actually worth to a buyer, not what you hope it's worth,is the foundation of any successful exit. The recast is where that gap is created. It's also where it can be closed, if you start early enough.

The honest bottom line

Every serious buyer in Australia runs a recast. They don't tell you they're doing it, and they often don't show you the detail, they just show you the offer. The offer looks lower than you expected, and the instinct is to blame the buyer, the market, or the broker.

In most cases, the gap was created years before the sale, in the way the business was structured, the way expenses were managed, and the assumptions the owner was carrying about what their profit figure meant to a buyer. The recast is just the mechanism that makes the gap visible.

Knowing this now gives you options. Entering a sale process without knowing it gives the advantage entirely to the buyer.