Performance EBITDA Advisors consults with buyers and sellers regarding EBITDA issues and computations. We are experts in analyzing traditional historical EBITDA, as well as special circumstances, including adjusted EBITDA, EBITDA less software development costs, pro forma EBITDA, run-rate EBITDA, 4-wall EBITDA, EBITDAC (Covid), and other variations.
We can assist sellers in preparing for the sale process by providing detailed EBITDA analysis and supporting schedules for adjustments. We can also help cash-basis companies convert historical results to accrual-basis EBITDA.
What, Why, and How of EBITDA
In 2002, Warren Buffett said:
It amazes me how widespread the use of EBITDA has become. People try to dress up financial statements with it. We won’t buy into companies where someone’s talking about EBITDA. If you look at all companies, and split them into companies that use EBITDA as a metric and those that don’t, I suspect you’ll find a lot more fraud in the former group. Look at companies like Wal-Mart, GE and Microsoft — they’ll never use EBITDA in their annual report.
People who use EBITDA are either trying to con you or they’re conning themselves. Telecoms, for example, spend every dime that’s coming in. Interest and taxes are real costs.
Well, Mr. Buffett, EBITDA has evolved and become the norm. EBITDA is now the official scorecard of non-public companies and accepted as a proxy for financial performance. But to your point, EBITDA is sometimes more art than science, as GAAP does not define EBITDA and companies and advisors can make their own assumptions.
There are many variations to EBITDA, such as:
Adjusted EBITDA or recast EBITDA, which can be used to describe EBITDA adjusted for any irregular items, non-recurring items, discretionary expenses, related-party items and many other subjective adjustments.
EBITDAR, which adds back rental costs and is used in the airline industry where planes are rented.
EBITDAC, which removes the impact of Covid-19 from EBITDA.
EBITDAX, which removes the impact of exploration costs, typically seen in oil and gas exploration industry.
Pro forma EBITDA, which is used when adjustments are based on hypotheticals. An example would be a company recently signed a new customers and pro forma EBITDA would include the expected EBITDA from the new customer.
Run-rate EBITDA, which is used when recent changes have been less than one year.
4-wall EBITDA, which is used when measuring the performance of a location, excluding administrative costs.
EBITDA, net of software development costs, which removes annual software development costs to present a more realistic cash flow for a software company that capitalizes development costs.
SSEBITDA, which assumes a steady-state that is neither growing or shrinking. This would include only the sales and marketing costs to replace the annual customer attrition. Usually seen in SaaS companies or security alarm type businesses.
Many of the above variations can be combined in the same presentation.