Govcon Greenhouse Inc.

One way to build Adjusted EBITDA Credits to Chris Reilly, follow him for more useful content. The original post ---- First though -- what are we creating here? Adj EBITDA = an APPROXIMATION of the operating cash flow / normalized earnings of a business. Where does it immediately fall short? It excludes Capex (like buying machinery & equipment) ——— Working from the top: (1) Start with Net Income b/c that's our "bottom line" Then we build our way back up with "Definitional" Adjustments first "Definitional" just means the literal items in the word "EBITDA" So that would be "Interest, Taxes, Depreciation, & Amortization" = this gives us "EBITDA, as defined," or said another way, "the EBITDA we can all actually agree on." ——— (2) Then we start getting creative, part 2 is the Management Adjustments This is Management saying "here are one-time things we did that won't continue in the future" The key point here is these are ??????????????????????????. You can see Management adjusted or "added-back" the cost of an Ad Channel that didn't pan out and a Consultant that helped put in a new IT system. = so now we've got "Management Adjusted EBITDA" which is the "EBITDA, as defined" plus discretionary adjustments from the management team. ——— (3) Keep going, now we get to the PE Firm. To buy the business, they had to hire service providers to help with diligence, think: accounting firms, background checks, environmental surveys, etc. The PE firm also takes a "management fee" that effectively compensates the PE firm for its time spent helping the company grow. Neither of these expenses will exist going forward (the transaction fees are one-time in nature, and the management fee goes away when the PE firm sells ("exits") the business) now we've got "Diligence Adjusted EBITDA" which is: = EBITDA as defined, plus - Management Adjusted EBITDA, plus - the PE firm adjustments ——— (4) Last step, now we're getting to "Lender Adjusted EBITDA" Let's say we just opened a brand new location... We might only have a few months of "operating history", but we know the new location is going to do well in the future. We might ask the lender for some "run rate credit" that illustrates what we expect the new location will do over the next several months. We want this b/c the lender uses our EBITDA to measure our covenants. So we add them all together: = Definitional, plus - Management Adjustments, plus - Diligence Adjustments, plus - Lender Adjustments = Lender Adjusted EBITDA (the true "bottom line") ---- Follow our page Accounting ABCs to learn more about the fundamentals of Accounting