Your $4 Million of EBITDA Is $3.4 Million to the Lender
Every acquisition has two EBITDA figures. The one that sets the price and the one that sets the debt, and nobody discovers the gap between them until the price is already agreed.
A business for sale is presented on adjusted EBITDA: reported earnings plus the items the seller argues a new owner would not incur. Owner compensation above market, expenses run through the business, costs described as one-time, savings expected from a change already made. Some of those adjustments are entirely legitimate.
The buyer’s offer is a multiple of that figure. The lender then builds its own version, and lends a multiple of that one. The two numbers are rarely the same.
A regional carrier at $4 million
Take an illustrative case. A regional trucking and dedicated logistics company is marketed at $4.0 million of adjusted EBITDA. Reported EBITDA is $3.05 million, and the memorandum adds $950,000 across five items.
A buyer agrees a price at 5.5 times adjusted EBITDA, which is $22.0 million, and expects debt at 3.0 times EBITDA, which is $12.0 million, leaving $10.0 million of equity.
Then the lender does its own work.
Owner compensation, $350,000 claimed. The owner pays himself $600,000 and works as general manager. Replacing that role costs $340,000, so the adjustment is real but smaller than claimed. The lender accepts $260,000.
Legal settlement, $150,000 claimed as one-time. Similar claims appear in two of the last three years. The category is not one-time even if this particular case was. The lender accepts $50,000.
Fuel purchasing savings, $250,000 claimed. A new purchasing program was signed two months ago and the savings are presented at their run rate. Credit agreements commonly require such adjustments to be factually supportable and realizable within twelve months, and often cap them as a share of EBITDA. With two months of history, the lender accepts nothing and revisits it once it appears in the numbers.
Owner personal expenses, $120,000 claimed. Vehicles, travel and a family member’s salary. Documentation supports $40,000 of it. The lender accepts $40,000.
Deferred maintenance, $80,000 claimed as one-time. Tractor overhauls the owner postponed. This is not an add-back at all. It is spending the next owner inherits, and if anything it argues for a downward adjustment. The lender accepts nothing.
Six hundred thousand, and then some
Of $950,000 of adjustments, the lender accepts $350,000. EBITDA for lending purposes is $3.4 million, not $4.0 million.
At 3.0 times, debt available falls from $12.0 million to $10.2 million. The price does not move, because the price was agreed on the seller’s figure and is now in a signed letter of intent. So the $600,000 of EBITDA becomes $1.8 million of equity, and the buyer’s cheque goes from $10.0 million to $11.8 million, an 18 percent increase discovered late in the process.
The buyer is also now paying 6.5 times the earnings the lender believes in, rather than the 5.5 times the deal was negotiated at.
Why lenders and sellers see it differently
Neither party is being unreasonable. The seller’s adjustments describe how the business would perform under a new owner, which is a fair way to value it. The lender’s version describes cash the business has already proven it can generate, because that cash is what services the loan whether or not the buyer’s plan works.
Sale processes have drifted toward broader add-backs, and lenders have responded with explicit limits. Credit agreements commonly require projected savings to be reasonably identifiable and factually supportable, require them to be realized within twelve to eighteen months, and cap aggregate adjustments as a percentage of EBITDA, often somewhere between 10 and 25 percent.
The result is predictable. The wider the add-backs, the larger the gap between the priced figure and the financed one.
The test worth running before the price is agreed
Every one of the five adjustments above could have been assessed before the offer was made. The documentation either exists or it does not. The savings are either in the numbers or still a projection. The one-time item either recurs in prior years or it does not.
Running that assessment early changes three things.
It sets the offer on the right figure. A buyer who knows the financeable EBITDA is $3.4 million can bid on it, structure around it, or ask the seller to carry the difference in a note.
It makes the gap negotiable while there is still something to negotiate. Before a letter of intent is signed, a $600,000 difference is a conversation about price or structure. After it, it is the buyer’s problem alone.
And it turns unsupported add-backs into supportable ones. Several of these are documentation failures rather than judgment calls. Personal expenses with receipts and a clean general ledger mapping survive. The same expenses described in a spreadsheet do not.
How Thalos Capital Approaches This
Thalos Capital works borrower-side on strategic debt from $50 thousand to $100 million and above, across the United States: acquisitions, ownership transitions, recapitalizations and partner buyouts.
On an acquisition the work starts before the price, with the earnings a lender will actually lend against: which adjustments are supported, which are capped, which will be rejected, and what that means for debt capacity and the equity the buyer has to fund.
That figure then goes to more than one source, because add-back treatment is a judgment and judgments differ. The same five items can produce a materially different financeable EBITDA at two lenders looking at the same company.
The buyer in the example did not overpay by any obvious measure. He negotiated hard on a number that was never going to be financed.
Most financing situations have more options than the borrower initially sees. A conversation is enough to map them. Submit your financing request at https://thaloscapital.com/contact.