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The EBITDA Definition Is Where Your Leverage Actually Lives

Beyond Multiples9:41 AM

newsletter@beyondmultiples.com

To: You

Your lender will tell you the deal is underwritten at 5.0x leverage. What they may not say clearly is that their EBITDA is not your EBITDA.

The leverage multiple on the term sheet is only as meaningful as the EBITDA figure underneath it. That figure is defined - sometimes over several pages of credit documentation - and the definition matters more than the headline number.

What the credit agreement actually says

Your management accounts show EBITDA of €20m. In the credit agreement, the lender's EBITDA definition might include or exclude:

• ✓Earn-out adjustments on recent acquisitions
• ✓Restructuring costs (up to a cap, over a look-back period)
• ✓Management fees paid to the sponsor
• ✓Synergy add-backs on planned but not yet realised cost savings
• ✓Run-rate adjustments for businesses acquired mid-period

Each of these has a number attached. The sum of these adjustments is the gap between your model and the lender's covenant calculation.

Where the tension lives

Lenders generally accept some add-backs. They push back on others. The ones they resist most are synergies and acquisition EBITDA.

Forward-looking cost saves are difficult to verify and easy to overstate. A lender who accepts an uncapped synergy add-back is effectively underwriting on a number that does not yet exist.

When you buy a business mid-period, its trailing EBITDA gets pro-rated or annualised. How that calculation works - and whether the lender's credit committee accepts it at the same level as your model - is a negotiation, not an assumption. Align the quality-of-earnings methodology with the credit agreement definition before term sheet execution, not after legal has drafted.

What to push for at origination

• ✓A clear, broad definition of "Consolidated EBITDA" with add-backs that match your operating model.
• ✓A 12-month look-back period for restructuring add-backs (not 6).
• ✓An uncapped synergy add-back for a defined integration period on add-on acquisitions.
• ✓Explicit alignment between the QoE EBITDA and the credit agreement definition before term sheet execution.