Anyone designing FP&A software please check this out:
Something I constantly run into in the Private Equity world is the concept of "add-backs."
Meaning, one-time expenses (or Revenue) that won't continue into the future.
Think PPP loans, consultants, or discontinued projects.
We use these add-backs to build "Adjusted EBITDA" to help arrive at business valuation.
Basically it goes:
Net Income
(+) Interest
(+) Taxes
(+) D&A
= EBITDA, then;
(+) add-back 1
(+) add-back 2
(-) add-back 3
(+) add-back 4
(-) add-back 5
= Adjusted EBITDA.
We always turn to Excel b/c there's no easy way to flag these "add-backs" in the software.
So, if there was a way to do this it would be a game changer.
B/c then we could:
(a) run "add-back reports" and;
(b) build "pro forma statements" much more easily
(what the Income Statement would have looked like without the non-recurring items)
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Things to keep in mind:
These add-backs have different "tiers."
First, they're "Definitional", think:
Interest
Taxes
D&A
But then, they're "Discretionary" based on the audience.
The Management team may have one bucket.
The PE firm another bucket.
And the Lender a separate bucket.
So, if there was a way to not only "tag" these add-backs in the first place,
but also have the functionality to say who they "belonged" to,
it would be SO helpful.
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We usually just keep all this info crammed in a spreadsheet somewhere called "add-backs."
And frankly just hope we can reconcile them at some point.
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I'm only so well-versed in FP&A software, so maybe this is already out there.
I've seen some but still pretty much live in Excel.
Does this functionality already exist?
If not, something to consider! The PE world would love it.
—Chris
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