Why add-backs to EBITDA should be scrutinized
The Multiplier Effect of Adjusted EBITDA
August 8, 2017    
Quality of Earnings
Committing to buy or finance a business based on a multiple of its adjusted EBITDA begs the question:  

Are management's adjustments legit?

Read on for a couple of examples where bad adjustments did NOT crater the deals. 
Senior Lender's $15 Million Question 

Underwriting a senior credit facility for a popular day spa company based on a 3.75x multiple of adjusted EBITDA may sound like a feasible deal - except when the math looks like this:

$15 million of air is a big number to fund!
Adjusted EBITDA

The borrower’s complicated organizational structure, with multiple operating entities and locations, made it difficult to validate management’s adjustments.  Our client was concerned that some adjustments actually were ongoing operational expenses, not legit add-backs such as one-time, non-recurring or startup costs.


We dug into the details and discovered two questionable adjustments totaling $200,000.  Management concurred with our assessment.  

Outcome:   The senior lender was satisfied that we found 97% of management’s adjustments were credible and they approved the financing deal with confidence.
  Rolling Up Rolling Assets
Due Diligence

A private equity client previously had turned to us for a Quality of Earnings (QofE) analysis of a trailer sales and leasing company.  Soon after successfully acquiring that platform company, they engaged us for a QofE of a prospective add-on acquisition.

We quickly discovered the target company’s accounting policies and procedures were inadequate, identifying:

  • Failure to consolidate related entities with common and majority ownership;

  • Insufficient reserves for bad debt and slow-moving parts inventory; 

  • Failure to update rental equipment inventory for current assets, dispositions and other changes;

  • Negative working capital variance of $900,000 as compared to the LOI; and

  • Approximately $325,000 in non-recurring annual expenses, favorable to our client.

Outcome:  Our client applied the information gained to successfully negotiate a favorable purchase price and closed the deal.

Where's the Brandlin Team?

  • Forensic Services:  Assisting two companies with business interruption claims, one of which related to 2016's Hurricane Matthew.

  • Litigation Services:  Providing litigation support and expert witness testimony for attorneys in the Northern Mariana Islands regarding attorneys’ fees and expenses.

  • Financial Advisory:  Providing financial advisory services related to EB-5 funding of the New York Battery Maritime Building.

  • Due Diligence: Finalizing a QofE analysis for a media company covering the Latin American and Caribbean financial markets.

6th Annual NAFER Conference
October 18-20, 2017

Jeff Brandlin will be a panelist presenting “Keys to a Cost-Effective Receivership: When to Hold ‘Em & Fold ‘Em,” and Brandlin is a proud sponsor. 

Hope to see you in Miami!
Brandlin & Associates is an exclusive provider of financial workouts and restructurings, forensic accounting, financial due diligence and litigation support for senior lenders, mezzanine funds, private equity groups, attorneys and middle market companies.

We pride ourselves on offering superior technical expertise, years of practical experience and unparalleled service to decipher financial and operational performance metrics. As a result, our clients are able to make informed decisions in a timely manner.
Brandlin & Associates
Los Angeles 310.789.1777 | New York 646.475.8507