The EBITDA Thesis in an M&A Offering Document

By Bill Snow

EBITDA (earnings before interest, taxes, depreciation, and amortization) is probably the most common investment thesis used in the M&A offering document. Actually, EBITDA is a de facto default setting in the brains for most business people; you can say it’s hardwired into their brains, and for good reason.

EBITDA is a measure of profitability, and profits are the ultimate measure of a company. Bank loans are often based on EBITDA; maintaining a certain level of EBITDA is a condition of a loan. The business world is just plain mad for all things EBITDA, and therefore, EBITDA is simply a generally accepted business convention.

EBITDA theses come in a few flavors. They’re all similar because they use EBITDA as a basis for valuation, but they differ in the timing for the measurement of EBITDA.

  • Most recent complete year: In many cases, the valuation is based on the most recent year’s EBITDA. This method produces a static number; because deals take months to complete, Buyer may want to obtain financial updates to make sure the company suddenly doesn’t take a nose dive in terms of profits. However, the most recent complete year EBITDA can provide the basis for an offer.

  • Trailing 12 month (TTM): This thesis is based on the EBITDA for the trailing (most recent) 12 months; the valuation isn’t static like the most recent complete year figures, so it may fluctuate up or down depending on the continuing performance of the company.

  • Forward EBITDA: In this case, all or part of the valuation is based on the future performance of the company. Forward EBITDA is a good thesis when an earn-out or some other form of contingent payment is part of the deal because if Seller is asking for a valuation based on the future performance of the company, he should be willing to put his mouth where his money is.