Quality of earnings
Reported EBITDA is the seller’s number. The buyer pays a multiple of a different one: earnings stripped of one-offs, owner arrangements, cut-off timing and generous accounting choices. That adjusted figure is where the price is really set, and at eight times earnings every line in the bridge is a negotiation.
An anomaly scanner now reads every journal line and proposes the adjustments, each with a confidence and a reason. It does not decide which ones stand. Accept or reject its flags, watch the price move, then structure an earn-out that has to survive the gap between the two sides.
Part one
The bridge
The scanner has read 48,212 journal lines and raised 10 flags. Accept or reject each one; the multiple turns every line into price.
Three cases
Adjusted EBITDA under each stance.
What the buyer pays for each unit of EBITDA. Every adjustment moves the price by this much.
Adjusted EBITDA
€3.99m
−13.3% on €4.6m reported
Enterprise value
€31.9m
adjusted EBITDA at 8×
Price at stake
−€4.88m
gap to reported at 8×
Flags accepted
9 of 10
1 below 70% confidence
Verdict
Adjusted EBITDA is 13% below reported; at 8× that is €4.88m of value the seller cannot defend.
The largest single line is capitalised development costs: €3.36m of price. One accepted flag sits below the scanner’s 70% confidence; a person has to own that call.
Reported to adjusted EBITDA
Select a flag to accept or reject it- Adds back
- Deducts
- Rejected
- Running total
Bridge from reported EBITDA of €4.6m to adjusted EBITDA of €3.99m, with 9 of 10 flags accepted. Each flag below is a checkbox.
Reported EBITDA€4.6m
Management accounts, last financial year€36.8m
Adjusted EBITDA€3.99m
9 of 10 flags accepted€31.9m
Diligence reports group adjustments this way because the argument is different for each: a one-off needs evidence it will not recur, a run-rate change needs a contract.
Where the adjustments come from
| Category | Accepted | EBITDA | Price at 8× |
|---|---|---|---|
| One-off2/3 | 2 of 3 | +€490k | +€3.92m |
| Owner-related2/2 | 2 of 2 | −€40k | −€320k |
| Run-rate1/1 | 1 of 1 | −€120k | −€960k |
| Cut-off1/1 | 1 of 1 | −€260k | −€2.08m |
| Capitalisation1/1 | 1 of 1 | −€420k | −€3.36m |
| Related party1/1 | 1 of 1 | −€150k | −€1.2m |
| FX / non-operating1/1 | 1 of 1 | −€110k | −€880k |
| Net adjustment | 9 of 10 | −€610k | −€4.88m |
Part two
The earn-out
The seller prices on reported EBITDA, the buyer on adjusted. An earn-out pays part of the difference only if next year proves the seller right.
Headline price
€36.8m
- At completion · 80%
- €29.4m
- Earn-out, at most
- €7.36m
Adjusted EBITDA supports €31.9m
The rest of the headline price is the earn-out.
Next-year EBITDA at which the earn-out starts to pay.
Next-year EBITDA at which it pays in full.
Payoff against next-year EBITDA
Touch or hover the chart for any outcome- Earn-out paid
- Floor
- Case outcome
Verdict
At this floor the earn-out pays nothing in the conservative case. Expect the seller to push it down.
The headline is €36.8m; in the realistic case the seller receives €30.6m, 83% of it. The completion payment is €2.48m below what adjusted earnings support at 8×, the seller’s best argument for a lower floor.
Case by case
| Case | Earn-out | Total price |
|---|---|---|
| Conservative25%EBITDA €3.99m | €00% | €29.4m |
| Realistic50%EBITDA €4.39m | €1.16m16% | €30.6m |
| Aggressive25%EBITDA €5.61m | €7.36m100% | €36.8m |
| WeightedEBITDA €4.6m | €2.42m33% | €31.9m |
Notes on the model
What it shows
- Small adjustments carry large prices. At a typical multiple, a six-figure EBITDA line moves the price by millions, which is why each one is argued.
- Confidence is not a verdict. The flags that move the price most are often the ones the scanner is least sure of, and those need a named reviewer.
- An earn-out only bridges a valuation gap if its floor sits where both sides believe the business can land. Set it above the seller’s own plan and it is a price cut in disguise; set it below flat earnings and the buyer pays for nothing.
How it works
- Ten illustrative flags against a reported EBITDA, each with a category, a scanner confidence and a proposed adjustment. Accepted flags run through the bridge in order.
- Enterprise value is adjusted EBITDA times the multiple. The headline price is reported EBITDA at the same multiple, split between completion and the earn-out.
- The earn-out pays nothing below the floor, everything at the cap and a straight line in between, on next year’s EBITDA.
- Conservative holds adjusted EBITDA flat, realistic grows it 10%, aggressive is the seller’s plan: 22% on the higher of reported and adjusted. The weighted view is 25/50/25.
What it leaves out
- Net debt, working capital and the rest of the equity bridge — the other half of any completion mechanism.
- Tax, deal costs and the time value of an earn-out paid a year or more after completion.
- How the business is run during the earn-out period, which is where most earn-out disputes actually begin.
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