GLOSSARY
What Is Adjusted EBITDA? | Agency M&A Definition
Adjusted EBITDA is a modified version of standard EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) that removes one-time, non-recurring, or owner-specific expenses to reveal the true ongoing profitability of a business. In agency M&A, it is the most common earnings metric used to determine valuation and negotiate purchase price.
Adjusted EBITDA in Agency M&A
Marketing agency owners frequently run personal expenses through the business — a car lease, family health insurance, a spouse on payroll in a limited role, conference travel that doubles as vacation. Adjusted EBITDA normalizes these items to show a buyer what the agency would earn under standard corporate management. When selling a digital marketing agency, common adjustments include removing above-market owner compensation (replacing it with a market-rate salary for a general manager), one-time legal or moving costs, personal memberships, and revenue or expenses from discontinued service lines. Buyers also adjust for below-market rent if the agency operates from owner-owned property, and for one-time investments like a website redesign or office build-out. The adjustment process is both an art and a negotiation — sellers want to maximize adjustments to inflate the earnings figure, while buyers scrutinize each add-back for legitimacy. A quality of earnings report from a third-party CPA can resolve disputes and lend credibility to the adjusted figure.
How Adjusted EBITDA Affects Agency Valuation
Because purchase price is typically calculated as a multiple of adjusted EBITDA, every dollar of legitimate adjustment directly increases the valuation. At a 6x multiple, a $50K add-back translates to $300K in additional purchase price. This creates strong incentives for sellers to document adjustments thoroughly. Buyers, however, will discount or reject add-backs that appear inflated or speculative. Over-adjusting is a common mistake that erodes buyer trust and can collapse negotiations. In the agency space, typical adjustments increase reported EBITDA by 15-40% — a $2M-revenue agency reporting $350K EBITDA might adjust to $475K after normalizing owner compensation and removing one-time costs, moving the valuation from $2.1M to $2.85M at 6x.
Example
A content marketing agency reports $2.8M revenue and $380K EBITDA on its tax returns. During the sale process, the owner identifies adjustments: $120K in above-market owner salary (owner pays himself $220K; a replacement GM would cost $100K), $18K for a personal vehicle lease, $12K for family cell phone plans, and $35K for a one-time office relocation. Adjusted EBITDA becomes $565K ($380K + $185K in add-backs). At a 5.5x multiple, the valuation increases from $2.09M (on reported EBITDA) to $3.11M — a $1.02M difference attributable entirely to proper earnings normalization.
Related Terms
Further Reading
Ready to find out what your agency is worth?