When you sell your business, you’ll want to have great clarity on these
When the day comes you begin talking with potential acquirers, a key question they will have pertains to what your “adjusted” EBITDA is (Earnings Before Interest, Tax, Depreciation and Amortization). Your EBITDA will be reflected on your profit & loss statement and the acquirer will want to know if this number is reflective of any addbacks or takebacks that they should know about.
An acquirer will look at the cash flows of your business and will use EBITDA as a proxy for this. And what they will want to have great clarity on is if they own the business, what costs might be adjusted that they may or may not incur if they own it. An Addback is a cost that you’re incurring in owning/running your business that they will not. A Takeback is a cost you’re not incurring but they will. As they analyze both of these as it relates to their potential ownership, they will model what they think your company EBITDA might be under their ownership.
Example of a Takeback:
Facility Rent – this becomes a takeback, or a negative adjustment to your EBITDA (meaning, it gets subtracted from your EBITDA as a negative adjustment) if you are not reflecting market rent in the current costs of operating your business. This is common when a business owner also owns the facility they are operating in. Because they own the business and the facility, they don’t charge the business any rent or they give the company a break on the rent. The acquirer will have to pay a full rent so they would adjust your EBITDA downward in their model given you aren’t accurately reflecting it currently.
Material/Supply Costs – let’s say you purchase a raw material or an important supply from a friend’s company and they are cutting you a deal in purchasing something from them. The acquirer most likely won’t get this friends and family discount as they will have to pay a higher market rate that will be adjusted upward when they take ownership of your company. This would then be a negative adjustment to your EBITDA. If the benefit you are deriving is saving you $250,000 annually, then your EBITDA is then adjusted downward by this same amount.
Example of an Addback:
Owner Compensation – an acquirer will look to see if perhaps as the company owner you are paying yourself an above market compensation level and when they replace you, it will cost them less to do so. This would then adjust your EBITDA upward and help you get a higher valuation because the exit multiple they will pay will then be based on using this adjusted, higher EBITDA number. Note, this can also become a takeback if you pay yourself below market rate and they will replace you with someone that must be paid more.
Owner Perks – perhaps you have a company car for yourself and your spouse and cell phones the company pays for and even potentially a club membership. The acquirer may determine that these types of perks won’t be extended under their ownership and will add this amount to your EBITDA, therefore raising it.
There are many potential Addbacks and Takebacks in any business and a preparation step for any owner is to analyze well in advance of talking with potential acquirers what these are. Use time as a friend to start tracking these today so you can command a higher valuation for your business. And you want to avoid the disappointment and surprise when the acquirer points out takebacks they have discovered during their due diligence and therefore are going to offer a lower valuation than you were expecting. Call us and we can provide you a schedule of EBITDA adjustments to consider for your business.
