Quick answer: A non-recurring item is a cost or gain that came from a specific event, is unlikely to return in the same form and can be documented, such as the settlement of a closed lawsuit or the move into a new building. Buyers apply four tests: the nature of the item, how often similar items appear, the cause, and the likelihood of recurrence. An item that appears in most years is treated as an operating cost, however the ledger labels it.
Key points
- One-time is a claim about cause, not a label in the ledger: buyers test the nature of the item, how often similar items appear, the event behind it and whether the cause has been removed.
- Gains are normalized as well as losses. Insurance recoveries, settlements received, gains on asset sales and relief income come out of earnings, and owners often forget them.
- A category that appears in most years of the history is part of running the business, even when each instance has its own story.
- Support is a closed event with documents: a settlement agreement, an insurance claim file, a lease, a separation agreement or an invoice trail.
- Buyers often give partial credit, accepting the amount above a normal level for the category and leaving the normal level in the expense base.
The four tests for a one-time item
An item is non-recurring when it came from a specific event, the event is over and nothing about the business makes a repeat likely. Buyers check that claim against four tests, and the label the owner put on the ledger entry does not enter into it.
| Test | Question the buyer asks | Passes when | Fails when |
|---|---|---|---|
| Nature | What is the item? | It arose from an unusual event with its own paperwork, such as a settlement, a move or a disaster | It is a routine cost carrying an unusual name |
| Frequency | How often have similar items appeared? | At most once in the history presented | It shows up in most periods |
| Cause | What caused it, and is the cause gone? | A specific event that ended, or a defect that was fixed | The cause belongs to the business model, such as regular storms or frequent customer disputes |
| Recurrence | Could it happen again in the ordinary course? | Unlikely given the controls and the industry | Common in the industry or tied to growth |
The tests apply to the category and not only to the instance. A particular lawsuit is unique, but legal cost is an ordinary expense for a business that is sued often. Failing the frequency test usually ends the argument, and failing another test lowers the credit. The guide to normalizing earnings shows where these adjustments sit among the others, and the overview of EBITDA add-backs covers the wider categories.
Examples and how buyers treat them
| Item | Buyers accept when | Buyers push back when | Support they expect |
|---|---|---|---|
| Legal settlement paid | A single closed matter with a signed agreement | Similar claims recur or others are pending | Settlement agreement, counsel’s letter confirming closure |
| Legal fees for the same matter | Fees trace to the matter by invoice | The fees are a general-counsel run rate | Invoices by matter |
| Relocation | One move with a lease and moving invoices | The company moves or opens sites regularly | Lease documents, mover invoices |
| Severance | A defined departure with a separation agreement | The seat is refilled at the same cost, or severance is paid regularly | Separation agreement, payroll record |
| Start-up cost of a new site or product | Pre-opening costs for a single site, with the site’s results shown consistently | The company opens sites or launches products every year | Budget, invoices, opening date, site results |
| Storm or casualty repair | A single event with an insurance file | Repairs of similar size occur in many years | Repair invoices, claim file |
| Pandemic-era closures and extra costs | Costs tied to specific closure dates | Costs that continued after reopening | Closure dates, invoices, CPA confirmation |
| Costs of an abandoned transaction | Advisor fees for one specific deal | An advisor retainer described as deal cost | Engagement letter, invoices |
| Gain or loss on equipment sales | Removed in both directions | Equipment is sold every year in the course of business | Sale documents, fixed asset register |
Start-up costs need one further check. A buyer wants symmetry, so a new site’s pre-opening costs may be added back only if the site’s early losses are treated the same way. If the company opens a site most years, the cost is the price of growth and stays in the expense base.
Costs that look one-time but come back
Recurrence hides behind a changing description. The same vendor bills for a “special project” under a new name each year. A “special” bonus is paid every December. Equipment is repaired after weather that is regular in the region. Recruiting fees accompany a position that turns over, and software migrations follow one another. A consumer brand launches products each season and calls the cost of each one-time.
The quickest test is a table of the account by period. Pull the activity for every period in the history, sort it by payee and read the pattern. When an item recurs but this period’s amount is unusually large, buyers often accept the excess above a normal level and leave the normal level in expenses. That partial claim is more realistic than a full add-back, and it is easier to defend. The guide to how buyers challenge add-backs describes the order in which these questions arrive.
One-time gains and credits that also come out
Normalization removes unusual income as well as unusual cost. The usual gains are an insurance recovery, a lawsuit award, a gain on the sale of equipment, forgiven debt, relief income, a vendor rebate catch-up and a termination fee paid by a customer. Each flatters EBITDA in the period it was booked, and owners tend to list the costs and miss the gains.
Keep a loss and its recovery together. Adding back the cost of a fire while leaving the insurance proceeds in earnings overstates adjusted EBITDA by the amount recovered. Business interruption proceeds raise a further point, since they replace profit lost while operations were closed. A buyer removes the proceeds and the unusual costs, and the lost sales during the closure become a separate question, covered in the guide to pro forma and run-rate adjustments.
A one-time schedule under test
Illustrative example: How a one-time schedule is tested
An owner presents reported EBITDA of $3,000,000 and five one-time costs. The buyer tests each against the history. The company also booked a $70,000 insurance recovery in other income, which the owner did not list. A placeholder multiple of 6.0x is used for the arithmetic.
| Item | Owner presents | Buyer accepts | Reason |
|---|---|---|---|
| Settlement of a closed contract dispute | $120,000 | $120,000 | Signed agreement, no similar claim in earlier years |
| Move to a new warehouse | $90,000 | $90,000 | One move, with lease and mover invoices |
| Severance for a departed sales manager | $60,000 | $60,000 | Separation agreement on file |
| “Special project” consulting | $110,000 | $0 | Same vendor billed in each earlier year |
| Storm repairs | $100,000 | $50,000 | Similar repairs in earlier years suggest a normal level of $50,000, so only the excess counts |
| Insurance recovery left in earnings | $0 | -$70,000 | Removed, since it will not recur |
| Total adjustments | $480,000 | $250,000 |
The owner’s adjusted EBITDA is $3,480,000, or $20,880,000 at 6.0x. The buyer’s is $3,250,000, or $19,500,000 at 6.0x. The difference of $230,000 of EBITDA costs $1,380,000 of price. The numbers are invented to show the mechanics and are not benchmarks.
Support for each item
Each item on the schedule needs a one-page memo behind it, with the event and its date, the amount by period, the ledger account, the document that proves it, the reason it will not recur and, where a cause was fixed, the evidence of the fix. A closed event with paper behind it moves through diligence quickly. The items that fail in practice are those with an explanation and no document, and the findings that most often reduce price include many of them.
Accepted items then go onto a separate line of the bridge from net income to adjusted EBITDA, so that a buyer can accept or reject each one without disturbing the rest. An owner who has run the frequency test first, and dropped what fails it, presents a shorter schedule that survives the review a quality of earnings report will apply.
Frequently asked questions
What counts as a non-recurring expense in EBITDA?
A cost that came from a specific, identifiable event that has ended and is unlikely to return in the same form, such as a closed lawsuit settlement, a one-time move, severance for a departed executive or fees for a deal that was abandoned. Buyers require documents that show the event and show that it is over.
Can an expense that appears every year be non-recurring?
Rarely. A buyer looks at the account across the whole history, and an item that shows up in most years is treated as part of operating the business. The seller can still argue for partial credit by showing that the underlying event differs each time and that this year’s amount was unusually high.
Do one-time gains reduce adjusted EBITDA?
Yes. Buyers normalize in both directions. An insurance recovery, a lawsuit award, a gain on selling equipment or forgiven debt included in earnings is removed. A seller who leaves a gain in while adding back one-time costs loses credibility, so presenting both together shows the period as if neither event had happened.
What support do buyers want for a legal settlement add-back?
The settlement agreement, the invoices from counsel by matter, and a letter from counsel that describes the matter, confirms it is closed and says whether similar claims are pending or likely. Buyers also check earlier years for similar legal costs, because a business that is sued often has litigation as a recurring cost.
Are pandemic-era costs and relief income still adjusted?
Items from those periods that remain in the history are tested like any other one-time item. Temporary closures, extra cleaning costs and relief income are separated from the normal run of the business, and buyers ask whether the seller’s CPA or counsel has confirmed the treatment of each relief amount.
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Related guides
- EBITDA Add-Backs: What Buyers Accept and What They Reject: Learn which EBITDA add-backs buyers accept in a sale, which they reject, and how adjusted EBITDA changes enterprise value, with a worked illustration.
- How Buyers Challenge Add-Backs and How to Support Yours: How buyers challenge EBITDA add-backs in the order the questions arrive, which evidence they accept and how to concede an item without losing credit or price.
- Quality of Earnings Findings That Reduce Price and How to Pre-Empt Them: The quality of earnings findings that most often lower a sale price, such as rejected add-backs and cut-off errors, with how each appears and how to pre-empt it.
- Pro Forma and Run-Rate Adjustments: Credit for Changes Not Yet in the Numbers: How pro forma and run-rate EBITDA adjustments work: price increases, contracts, lost customers, savings, acquisitions and closures, and the evidence buyers require.
- Quality of Earnings Report: What It Is and What Buyers Test: A quality of earnings report tests whether a company’s reported profit is real and repeatable. See what buyers examine, how it affects price and how sellers prepare.
- Normalizing Owner Compensation: Replacement Salary, Bonuses and Family Pay: How to restate owner pay for EBITDA: price each role the owner fills at market cost, then treat bonuses, distributions, benefits and family members on payroll.
This guide is general education. It is not a valuation opinion, appraisal, investment advice, or legal or tax advice. How these guides are made.