“Addbacks”, in the jargon of M&A, are one-time expenses that can be legitimately added to a company’s EBITDA. The key to “Addbacks” is that they are legitimate, meaning they are expenses that a new company owner will not incur post-acquisition.
While there are many examples, some of the most frequent include the following:
- Discretionary: expenses that do not necessarily contribute to the operating results of the business and are unlikely to continue under a new owner. These can include excess owner compensation and benefits, and certain travel and entertainment.
- Non-operating: expenses that are not required in or related to the operations of the business. These can include excess rents paid to affiliates and charitable giving.
- Non-recurring: expenses that are one-time in nature and unlikely to occur again in the future. These can include facility relocation expenses, one-time technology upgrades, and M&A transaction-related costs.
- Accounting Adjustments: expenses that you may not have recognized in the past but will be recognized by the buyer post-acquisition. Unfortunately, these “Addbacks” often result in a reduction to your EBITDA, not an improvement. Depending on the buyer (for example, if they are publicly traded or a large PE firm), they may be required to take charges for accruals and reserves, which will result in lower EBITDA. We refer to these as “Negative Addbacks”.
Have a great day everyone.
Managing Director, Defense