Define: Adjusted EBIT
Adjusted EBIT is a contractually defined measure of a company's earnings before interest and tax, modified by specific add-backs, deductions, or exclusions agreed by the parties. It is used in agreements to strip out interest and tax while normalizing for one-off, non-recurring, or non-operational items, giving a cleaner picture of underlying operating performance for purposes such as pricing, earn-outs, or covenant testing.
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What Adjusted EBIT Means in a Contract
Adjusted EBIT refers to a company's earnings before interest and tax, further modified by a set of contractually agreed adjustments. Unlike standard accounting measures, Adjusted EBIT is not a fixed concept found in generally accepted accounting principles. It is a bespoke financial metric that the parties to a contract define for their own purposes, typically to measure operating profitability while removing the distorting effects of financing decisions, tax positions, and unusual or non-recurring items.
In practice, the term appears when parties want a cleaner, more comparable figure than raw net income or unadjusted EBIT. By excluding interest expense and tax, and then layering on specific add-backs or deductions, Adjusted EBIT is intended to reflect the ongoing operational health of a business, independent of its capital structure or one-off events.
Because it is a defined term, its meaning depends entirely on the contractual language surrounding it. Two agreements using the same label, Adjusted EBIT, might calculate materially different figures depending on what adjustments are specified.
How Adjusted EBIT Is Defined or Measured
Typically, a contract will start from net income or EBIT as reported in the company's financial statements, then specify a list of adjustments. Common exclusions include restructuring costs, impairment charges, gains or losses on asset disposals, share-based compensation, and other items deemed non-recurring or non-operational.
The definition clause usually sets out both the starting point and the precise adjustments to be made, often referencing the company's accounting policies or a specified accounting standard as the baseline. Some contracts include a schedule or exhibit listing agreed adjustments line by line, reducing the risk of dispute later.
- Starting figure, such as net income or reported EBIT
- Addition of interest and tax where not already excluded
- Add-backs for one-off or non-recurring expenses
- Deductions for non-operational gains
- Reference to the accounting framework used to prepare underlying figures
Where Adjusted EBIT Appears in Agreements
Adjusted EBIT frequently appears in mergers and acquisitions agreements, particularly in earn-out provisions where deferred consideration depends on the target's post-completion performance. It also shows up in financing agreements as a component of financial covenants, and in management incentive plans where bonus payments are tied to operating performance.
These provisions are common across sectors including Relevant Circumstances
Relevant Sectors