EBITDA
and EBITDAC (EBITDA plus a “c” for coronavirus)
Gray Reed có bài EBITDA, Adjusted EBITDA, and EBITDAC in the Age of COVID-19 giới thiệu về EBITDAC. Bài cũng trình bày cơ bản về EBITDA và sử dụng EBITDA trong hợp đồng M&A và hợp đồng vay. Dưới đây là bản mà Ngữ rút gọn, với thứ tự các mục đã được thay đổi với bản gốc.
Overview of EBITDA and Adjusted EBITDA
EBITDA [earnings before interest, taxes, depreciation and amortization] is one of the most commonly used […] measurements of earnings. Adjusted EBITDA is calculated by adding or subtracting certain expenses to and from EBITDA in order to provide a clearer picture of a company’s profitability and to make it easier to compare a business from year-to-year and to its industry competitors.
Gross Operating Revenue
– Operating Costs and Expenses
= Consolidated Net Income
+ Interest Expense
+ Income Taxes
+ Depreciation and Amortization
= EBITDA
+/- Permitted Adjustments and Addbacks
= Adjusted EBITDA
EBITDAC and M&A Transactions
If you have not heard of EBITDAC (EBITDA plus a “c” for coronavirus), you might soon. The emerging acronym was allegedly first used by Schenck Process LLC, a German applied measuring technology company owned by US-based private equity firm Blackstone, reportedly added back 5.4 million euros to its earnings (the amount it claims it would have earned but for the pandemic). So what does a coronavirus adjustment include? Unlike EBITDA addbacks, which are based on GAAP [generally accepted accounting principles] and other commonly accepted guidance, EBITDAC can be whatever a company wants or, in the case of M&A transactions, whatever the parties negotiate. For example, while lost revenue [e.g. expenses paying for temporarily idle employees or facilities in compliance with state shutdown orders countering pandemic] is unlikely to be a permitted addback in a credit agreement and is explicitly prohibited for SEC reporting purposes, it may be useful and appropriate when calculating EBITDAC for purposes of determining the purchase price of a business in an M&A transaction.
While many analysts say that EBITDAC can be a misleading financial metric, others argue that not making a COVID-19 adjustment to account for the pandemic’s impact on a business can be even more misleading. In any case, while EBITDAC is not allowed in GAAP financials or in public company filings, we expect to see coronavirus adjustments to EBITDA in future private M&A transactions.
Potential Uses for EBITDAC in M&A Transactions
Purchase Price: A multiple of EBITDA is a common valuation technique for determining the purchase price in M&A transactions. Many businesses have seen dramatic changes to their EBITDA (some positive, some negative) as a result of the pandemic. Using a trailing 12 or 24 month EBITDA [A company's trailing 12 months represent its financial performance for a 12-month period; it does not typically represent a fiscal-year ending period.] without a coronavirus adjustment (such as a lost revenue adjustment as discussed above, or an adjustment to account for temporarily increased revenues) could dramatically overstate or understate the value of a company.
Earnouts: Earnouts are often based on hitting pre-defined EBITDA targets. A coronavirus adjusted EBITDAC may be more appropriate for targets that are based on a percentage increase over a pre-closing period that includes a period where the business had a significant economic impact from COVID-19.
Executive Compensation Agreements: Similar to earnouts, executive compensation arrangements often use EBITDA targets as triggering events for compensation. Agreements with targets based on increases from COVID-19 impacted periods may need an adjustment to baseline EBITDA figures to appropriately account for coronavirus economic impacts.
EBITDA and Adjusted EBITDA in Lending Transactions
EBITDA is an important measure in lending transactions as it is often used by lenders to evaluate whether borrower has sufficient cash flow to service the loan. The definition of Adjusted EBITDA is a highly negotiated term in a loan agreement. Most loan agreements typically allow for addbacks to EBITDA for “extraordinary, non-recurring and unusual costs, expenses and losses.” […]
“Extraordinary” […] a cost arising from an event or transaction was “extraordinary” if the underlying event or transaction was (i) unusual (discussed below), and (ii) infrequent (not frequently expected to be incurred in the foreseeable future).
“Unusual” […] an underlying event or transaction that “possesses a high degree of abnormality and is of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates.”
“Non-Recurring” […] an expense is “non-recurring” if the expense is caused by an event or transaction that has not occurred within the most recent two years and is not expected to recur within the following two years.