EBITDA normalisation, working capital and net debt – what really determines a company’s price in M&A?
Conversations about selling a company often boil down to a simple shorthand: EBITDA × multiple = company value. In a real transaction, that's only the starting point.
A buyer doesn’t pay for “book EBITDA” – they pay for the earnings they consider recurring, then move from Enterprise Value to the price for the shares through adjustments for net debt, cash, working capital, and other debt-like or cash-like items.
It’s precisely at this stage that the biggest gap most often appears between the price an owner expects and the amount that actually ends up with the seller.
From EBITDA to the price for the shares
establish normalised EBITDA
apply the agreed multiple and set Enterprise Value
adjust for cash and net debt
adjust for the gap between actual working capital and the level considered normal
account for other debt-like and cash-like items
arrive at Equity Value – the price economically due to the owners
EBITDA normalisation: the historical result isn’t always the recurring result
Financial due diligence isn’t just copying EBITDA from the financial statements. A buyer tries to establish run-rate profitability – the level of earnings the business can sustain after the deal. EY explicitly names identifying normalised earnings, working capital needs, and debt-like items as core areas of transaction due diligence.
Typical positive adjustments can include one-off restructuring costs, non-recurring dispute costs, extraordinary expenses tied to preparing the company for a transaction, or other costs that genuinely won’t recur after a change of ownership. Not every “one-off” should be accepted, though – a buyer usually checks whether the expense was truly exceptional or actually a regular part of running the business.
Adjustments can also work the other way. If the owner draws compensation well below market rate, and a professional manager will need to be hired after the deal, normalised EBITDA may be reduced. The same applies to services from related parties on non-market terms, underestimated infrastructure maintenance costs, or expenditure that was historically capitalised even though it’s economically an operating cost.
Equity value would land around PLN 53.6m – even though the opening conversation may have mentioned “6 times EBITDA.”
Working capital: the buyer expects a business with a normal level of operating funding
Net working capital usually isn’t treated as extra value a seller can “take out” before closing. A buyer expects the business to be handed over with a level of receivables, inventory and operating liabilities that lets it run normally after the deal.
That’s why the parties agree a target, or peg – the level of working capital considered normal. If actual NWC at closing is below the target, the price can be reduced; if higher, the mechanism can work the other way. KPMG notes that for seasonal businesses, choosing the right NWC benchmark materially affects the price, and that an average of historical months is often more appropriate than a single point-in-time figure.
Net debt and debt-like items: not just bank loans
One frequent source of negotiation is the very definition of debt. Net debt usually covers interest-bearing financial liabilities net of agreed cash, but in transactions the list of debt-like items tends to be much broader. It can include overdue taxes, shareholder loans, certain lease liabilities, overdue bonuses, liabilities for asset purchases, unpaid dividends, certain provisions, or other items that economically mean the buyer will have to fund a pre-deal cost after closing.
There’s no single universal list. What matters is consistency between due diligence, the SPA definitions, and the pricing model.
Locked box or completion accounts?
In a locked box, the price is set on a historical balance sheet from a fixed date, and the parties protect value against so-called leakage. In completion accounts, a headline price is set earlier, but the final equity value is adjusted after closing based on actual net debt and working capital at closing.
Locked box
Greater price certainty, often preferred by sellers in competitive processes. Price fixed to a historical balance sheet, protection against leakage.
Completion accounts
Greater precision as of the closing date. Final price adjusted after closing for actual net debt and working capital.
What should an owner do before starting the process?
- prepare a bridge from reported to normalised EBITDA and gather evidence for every adjustment
- analyse 12–24 months of working capital, not just a year-end snapshot
- draw up your own list of debt-like and cash-like items
- check whether management accounts can defend results at a monthly level
- agree the EV-to-equity bridge logic with your advisor before an LOI or SPA appears
A well-prepared seller doesn’t wait for the buyer to be the first to define normalised EBITDA, normal working capital, and debt. Otherwise, part of the price negotiation only starts once a headline valuation has already been agreed – often surprisingly late.
Three items we most often dispute in Polish deals
The first is shareholder loans and related-party settlements. In many owner-run companies, flows between the company, the owner and their other entities feel natural. In a transaction they become a debt-like item – better to sort them out beforehand than to explain them in due diligence.
The second is leases. After changes in accounting standards, their classification can be ambiguous, and with an extensive machine fleet or vehicle fleet the difference in approach can run into millions.
The third is working capital seasonality. If a company has a clear cycle – inventory build before the season, receivables collection after it – the closing date itself becomes a pricing parameter. Worth calculating this ahead of time and consciously choosing the closing moment.
This material is for informational purposes only and does not constitute legal, tax or valuation advice.
Sources used: EY (Due Diligence Services), KPMG (Locked Box vs Completion Accounts), KPMG Poland (Tax aspects of price adjustments in M&A), PwC (normalized earnings, net debt and working capital).
