Adjusted EBITDA 101
Best Practices For Buyers and Sellers
Happy Friday folks!
Thanks for joining us for another edition of Atlasview Insights. We use this newsletter to share our strategies, philosophies, experiences, and lessons we’ve learned along the way. Small bite-sized insights for business owners, dealmakers, and investors.
In this newsletter, we cover:
Interested in Leading a PE-Backed Company?
Have An Opportunity For Us?
Adjusted EBITDA 101
Recommended Read: The Case For Small Buyouts
ICYMI - Popular Previous Issues
Our Deal Process
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Have An Opportunity For Us?
Before we jump into this issue, a quick reminder, Atlasview Equity Partners is a private equity firm that acquires and builds B2B businesses in the lower middle market. For platform investments, we look for:
Business Model: vertical software, business services, specialty distributors
Business Size: minimum $2m EBITDA or $10m revenue
Business Profile: sticky B2B customer base
Business HQ: US & Canada
For add-on acquisitions for our portfolio companies, we have no size/geography criteria. We’re seeking add-ons in the library, archive, legal, and government niches for our portco Soutron Global and HVAC distributors for our portco PureFilters.
Whether you’re a business owner interested in working with us, or an intermediary with a deal to share, always feel free to contact us!
Adjusted EBITDA 101
Adjusted EBITDA is a commonly used measure of performance for businesses of all sizes and a basis for valuation. There are no clear-cut rules or accounting standards for reported Adjusted EBITDA. As a result, the metric is highly subjective and can be a wide range of numbers, depending on who you ask. So let’s take a closer look at Adjusted EBITDA.
Adjusted EBITDA Refresher
EBITDA (earnings before interest, taxes, amortization, and depreciation) is a short-cut metric for measuring how much cash earnings a business generates annually. Yet, making those 4 adjustments often isn’t enough to arrive at a business’s economic profits. There often needs to be further adjustments for expenses and or revenues accounted for in EBITDA that are not considered to be “core” or essential to operating the business.
Here are some examples of common EBITDA adjustments:
One-off events – lawsuits, natural disasters, or anything else that is a one-time event. The adjustment could be to remove the expense from EBITDA.
Overpaid or underpaid employees – businesses can over or undercompensate employees. The adjustment here would be to use market-rate salaries for key employment positions.
Personal expenses – many businesses, especially smaller ones, will have the owner’s personal expenses reflected on the P&L. Adding back items such as meals & entertainment, travel, home office, and automobile expenses might make sense. In smaller transactions, it’s common for the owner’s salary to also be added back to EBITDA in full to arrive at “seller discretionary earnings” or SDE.
Other streams of revenue – businesses that have other streams of revenue that aren’t connected to the core business, consider subtracting it from EBITDA.
Intercompany transactions – businesses that have multiple entities could have intercompany revenue and expenses that aren’t true economic activity. These should be adjusted for accordingly.
Buyer Best Practices
It’s important to understand what is an acceptable adjustment as a seller (or their advisor) will be incentivized to include as many as possible to improve their EBITDA. As a buyer it is critical to ask yourself “Is this really non-core and or non-reoccurring to the operating business I am buying?” and “Will I not experience the proposed adjusted revenue/expenses under my ownership?”.
Seller Best Practices
As a seller, you know the business better than anyone else so you should know what adjustments make the most sense. Also, keep in mind, that most buyers will perform a quality of earnings analysis (QofE), so you’ll want to ask yourself “Will these adjustments pass scrutiny from a 3rd party QofE provider?”. Being transparent and candid about adjustments upfront is beneficial for all parties involved in the transaction.
If you have any questions about EBITDA adjustments for your business, always feel free to reach out to us. Our team has access to some great resources for anyone who is looking to navigate this metric.
Recommended Read: The Case For Small Buyouts
RCP Advisors published a nice research piece called The Case For Small Buyouts. It’s a great case study on lower-middle market investing and its structural advantages. The team at Atlasview enjoyed the case study, and highly recommend it to all private equity investors.
In Case You Missed It
Here are some of our previous popular issues:
4 Non-Financial Reasons Owners Sell
Evaluating Pricing Power
Our Process at Atlasview
We pride ourselves on having a simple and transparent process. Our streamlined process enables us to move quickly to get you answers fast.
Step 1: Contact Us
Step 2: Execute NDA & Schedule Call
Step 3: Receive Offer & High-Level Terms
Step 4: Execute LOI & Complete DD
Step 5: Close Deal & Receive The Cash
Step 6: The Fun Part Begins!
Whether you’re a business owner interested in working with us, or an intermediary with a deal to share, always feel free to contact us!
About Atlasview
Atlasview Equity Partners is a private equity firm that acquires and builds B2B businesses in the lower middle market. We combine patient capital with proven strategies to deliver predictable results for our stakeholders.