Adjusted EBITDA removes one-time costs to show what a business normally earns

Adjusted EBITDA takes the standard EBITDA number and removes expenses that don't happen every year — things like a lawsuit settlement, a building sale, or a one-time restructuring cost. The goal is to show what the business actually earns from its normal operations, stripped of the noise.

When you're applying for a mortgage or a business loan, lenders use adjusted EBITDA to decide whether you can afford the payments. They want to know your real earning power, not a year that was unusually bad because you paid a legal judgment or unusually good because you sold an asset. Adjusted EBITDA gives them that picture.

The catch is that there's no single official rule for what counts as a "one-time" expense. Different lenders accept different adjustments, and business owners sometimes push to remove expenses that really should stay in the number. Understanding what adjustments are reasonable — and which ones lenders will actually accept — matters when you're trying to may have access to for financing.

Key Takeaways

  • Adjusted EBITDA removes one-time or unusual expenses from the standard EBITDA calculation to show normal operating earnings.
  • Lenders use adjusted EBITDA to assess whether a business owner can reliably make loan payments, especially for mortgages tied to business income.
  • Common adjustments include legal settlements, asset sales, restructuring costs, and owner compensation changes, but lenders set their own rules about what they'll accept.
  • You'll need documentation for every adjustment you claim — receipts, invoices, or court records — or the lender will disallow it.
  • Different lenders may accept different adjustments for the same expense, so the adjusted EBITDA number can vary depending on who's reviewing it.

Common expenses that get removed in adjusted EBITDA

The most frequently adjusted items are legal judgments or settlements, one-time severance payments when you lay off staff, and gains or losses from selling equipment or property. If you paid a $50,000 lawsuit settlement in one year but never will again, that comes out. If you sold a building and made a $200,000 profit, that comes out too — it's not part of running the business day-to-day.

Owner compensation changes also get adjusted. If you took a $100,000 salary cut in the year you're applying for a loan, lenders may add that back in, because they want to see what you'd normally pay yourself. Similarly, if you hired a new owner or manager and their salary is higher than the previous person's, some lenders will adjust for that difference.

Unusual expenses tied to a specific event — like emergency repairs after a fire, costs to move to a new location, or professional fees for a merger — are often removed. The logic is that these don't reflect how the business runs in a normal year.

What adjustments lenders will and won't accept

Lenders have different thresholds for what they'll remove. Some will accept adjustments for any expense under a certain dollar amount — say, anything under $5,000 or $10,000 — without much documentation. Others require proof for every single item, no matter how small.

Most lenders will not remove recurring expenses, even if they're labeled as "one-time." If you pay a professional service fee every year but it varies in size, they'll keep it in. If you have an annual legal bill that sometimes spikes, they'll keep the average in. The rule is roughly: if it happens more than once every few years, it stays.

Lenders also won't remove expenses that look like you're hiding poor management. If you claim that high utilities or high insurance costs are "one-time" when they're actually normal for your industry, the lender will push back. They want to see the real cost of running your business, not a fantasy version.

How to document adjustments so lenders accept them

For every adjustment you claim, have the original document ready: the settlement agreement, the severance letter, the invoice for the one-time repair, the property sale closing statement. Lenders will ask for these, and if you can't produce them, the adjustment gets disallowed and your adjusted EBITDA drops.

Write a brief explanation for each adjustment — one or two sentences saying what it was and why it won't happen again. This goes in a memo or email to your lender. Don't make it sound defensive; just be factual. "Paid $15,000 legal settlement in March 2023 related to a contract dispute that has been resolved" is better than "had an unusual legal expense."

If you're adjusting owner compensation, show the calculation clearly. If you took a $50,000 pay cut, show what you paid yourself in the year you're applying for the loan and what you paid yourself in prior years. If you're adding back a salary difference because you hired a new manager, show both salaries side by side.

Why adjusted EBITDA matters for mortgage and business loans

Lenders use adjusted EBITDA to calculate your debt service coverage ratio, or DSCR — the number that tells them whether your income is high enough to cover the loan payment plus your other debts. If your standard EBITDA is $150,000 but your adjusted EBITDA is $200,000 after removing a one-time legal cost, that higher number might be the difference between approval and denial.

For self-employed people and business owners, adjusted EBITDA is often more useful than tax return income because tax returns include deductions that aren't real cash expenses. A lender cares about cash you actually have to pay a loan, not accounting deductions. Adjusted EBITDA gets closer to that real number.

The flip side is that lenders know business owners have an incentive to remove as many expenses as possible. That's why they scrutinize adjustments and why they set rules about what they'll accept. A lender might accept your adjustment for a legal settlement but reject your adjustment for a temporary spike in marketing spend, because marketing is part of running the business.

The difference between adjusted EBITDA and other income measures

Standard EBITDA includes all operating expenses, one-time or not. Adjusted EBITDA removes the one-time items. Net income (what you see on a tax return) includes taxes and interest payments, which EBITDA does not. For loan purposes, lenders prefer adjusted EBITDA because it shows operating earnings before debt service, which is what they need to know.

Some lenders also look at "normalized EBITDA," which is similar to adjusted EBITDA but goes further — it might adjust for seasonal variations or industry-specific costs. A seasonal business like landscaping might normalize its income across all 12 months even though most revenue comes in spring and summer. This is less common for mortgage lending but more common for business loans.

Red flags that make lenders skeptical of adjustments

If you're removing more than 10 to 15 percent of your EBITDA in adjustments, lenders start asking harder questions. It suggests either that your business had an unusually rough year or that you're being aggressive with what you're calling "one-time." Either way, they want to understand why.

Adjustments that are vague or hard to prove are red flags. "Miscellaneous one-time costs" without documentation won't fly. "Unusual consulting fees" that you can't explain will get disallowed. Lenders want specificity and proof because they've seen business owners try to hide recurring expenses by calling them one-time.

If you're adjusting the same category of expense year after year, that's a sign it's not actually one-time. If you claimed a "one-time" legal cost in 2022 and another "one-time" legal cost in 2023, lenders will keep both in your adjusted EBITDA because legal costs are clearly part of your business.

Frequently Asked Questions

Can I adjust for owner salary if I'm underpaying myself?

Yes, many lenders will add back a portion of owner compensation if you're paying yourself less than market rate for your role. You'll need to show comparable salaries for similar positions in your industry and area. However, lenders won't add back unlimited amounts — they want to see a reasonable adjustment, not a fantasy salary.

What if the lender and I disagree on what counts as one-time?

The lender's definition is what matters for that loan. If they won't accept an adjustment you think is valid, you can ask them to explain their reasoning and provide documentation to support your case. If they still won't budge, you can try a different lender — different lenders do have different standards — or you can proceed with the lower adjusted EBITDA number.

Do I have to use adjusted EBITDA, or can I just use regular EBITDA?

You can use either, but adjusted EBITDA usually gives you a higher number, which helps your loan application. Most lenders will ask for both and will review your adjustments. If your adjustments are reasonable and well-documented, using adjusted EBITDA is to your advantage.

How far back do lenders look at adjustments?

Most lenders focus on the last two to three years of tax returns and financial statements. They want to see whether adjustments are consistent and whether they're tied to genuinely one-time events. If you're adjusting for something that happened five years ago, they probably won't care, but if you're adjusting for something that happened last month, they'll want to know it won't happen again.