Ever wonder how EBITDA changes in an M&A transaction (pre- and post-close)?  This post walks through the differences...

EBITDA, as Defined

This stays the same pre- and post-close because it is the literal definition of EBITDA: Earnings (Net Income) before Interest, Tax, Depreciation, Amortization.

This is basically the EBITDA we all (should) agree on.

Management-Adjusted EBITDA

The discretionary adjustments proposed by management pre-close. These typically go away post-close because they should be one-time in nature and won't be incurred going forward.

In a perfect world, all historical adjustments would be addressed on a go-forward or "pro forma" basis in the P&L, and therefore wouldn't require any "add-backs."

As a result, the forecast shows zeroes. They should only be reflected in the history (Actuals).

Diligence-Adjusted EBITDA

Contains pre-closing adjustments made by the PE team based on its review of the Management adjustments and other things discovered during diligence (and detailed in a QofE).

From a modeling perspective, this is a great place to reverse, back out, or modify any Management Adjustments the PE firm doesn't find reasonable or thinks should change.

You're simply creating a negative (or some kind of offset) of a particular Management Adjustment and labeling it as such, as opposed to having to delete something from the Management-Adjusted section. 

Post-close, it includes the Transaction Fees as well as the Private Equity Management Fee, since it will be non-recurring once the PE firm exits the company.

Note: the "management fee" sometimes comes up for debate with lenders, but typically the "ask" is to include the management fee in the EBITDA calculation and negotiate from there.

Zoom Out:

Pre-close, both buyer and seller are trying to adjust EBITDA to arrive at a normalized profitability so everyone can agree on a basis for valuation.

Post-close, the EBITDA (should be) cleaner to only reflect regular definitional adjustments plus anything directly as a result of the transaction (because it was all ironed out in diligence).

In reality, it's common to still see management adjustments as the team accounts for one-off items that might be non-recurring going forward.  However, the forecast should still always be zero for management, but you may see some new ones show up in the actuals.

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