LUTZ BUSINESS INSIGHTS
ebitda adjustments + 5 expense categories you should review
dani sherrets, financial analyst
When assessing how to value a business for an M&A deal, buyers will typically focus on adjusted EBITDA as their primary metric. This is reported EBITDA that is unusually high or low for various reasons, or will cease to exist post-transaction. These adjustments will directly impact the value of your business in the eyes of a potential buyer. Knowing what to expect on this topic can help you avoid surprises regarding your company’s valuation. For more detail on this topic, please refer to our previous blog, “Understanding EBITDA and Normalizing Adjustments”.
The following are five expense items that commonly impact adjusted EBITDA:
#1 Owner’s Compensation
A business owner can directly control his/her compensation. If the owner’s salary is deemed to be above market-rate levels, an add-back for any excess salary would be appropriate. In addition, if compensation is paid to family members who are not active in the business, that also would be an add-back and removed from expenses.
#2 Owner Personal Expenses
If the business includes owner personal expenses that would not continue after the deal, they would be added back. These items are added back if they are nonessential to running the business. Examples include personal vehicles, insurance, travel, entertainment, and club memberships, but only if they are not utilized for business purposes.
If a selling company is paying above or below market rent, the income statement should be adjusted accordingly to reflect market rates. When shareholders also own real estate in a related entity that rents back to the business, it is not uncommon for rents to be out of sync with the market.
#4 Gaps in the Management Team
If a business owner takes on many duties that would typically fall to others, a buyer may argue there are gaps in the management team. If there are hiring needs for new executives, a business may see a negative adjustment (increase expenses) for salary, benefits and other costs.
#5 Legal/Litigation Items
Expenses for one-time/nonrecurring legal matters would likely be add-backs. Importantly, these add-backs would not include typical ongoing legal expenses that are common to a business. Many buyers will examine historical expense levels to determine a normalized level.
In conclusion, these 5 expense categories should be closely examined in order to identify relevant EBITDA add-backs. Any omissions could negatively impact your business valuation. Along those lines, Lutz M&A can help assist with these calculations. If you have any questions on these matters, please contact us.
ABOUT THE AUTHOR
DANI SHERRETS + FINANCIAL ANALYST
Dani Sherrets is a Financial Analyst at Lutz with over three years of relevant experience. She specializes in merger and acquisition advisory services and business valuation.
AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
- National Association of Certified Valuators and Analysts, Member
- Certified Valuation Analyst
- BBA, Academy of Economic Studies, Bucharest, Romania
- MBA in Finance, Bellevue University, Omaha, NE
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