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EBITDAC: The New Post-COVID-19 Term

By Generational Equity

05/11/2020

When I first saw the mug for EBITDAC for sale, I thought it was an attempt at a bad joke. However, it could seriously be considered a new expression for financial earnings moving forward, which represents:

E – Earnings

B – Before

I – Interest

T – Taxes

D – Depreciation

A – Amortization

C – Coronavirus

This is an accounting principle that is vital for every business owner to understand post-pandemic. Prior to the COVID-19 outbreak, if you wanted to sell your business for the most profit, you needed to have a professional M&A firm “recast” your historic financials to remove any one-time expense items that would not be ongoing and part of operations under a new owner.  

Some examples of these include:

  • Losses due to fire
  • Losses due to employee embezzlement
  • Other business disruptions beyond your control (floods, earthquakes, tsunamis)
  • Cars, planes, and boats being expensed through the business for your personal use
  • Inactive family members on the payroll
  • Compensation for active family members on the payroll that were being paid well above fair market
  • Any of your compensation that was above fair market value
  • Memberships at country clubs, yacht clubs and gyms for your personal use
  • Travel and vacations for you and your family that the company expensed

And lots more. But now to this list, you may be able to add loss of revenue and income due to the impact of the Coronavirus.

Recasting has always been a critical first step in valuing any business for eventual sale. In the past if you didn’t recast these items off your historic financials and you used your tax returns as the basis of your future business projections, your revenue and earnings would be understated and consequently, so too would any offer you receive from buyers.

The Real Impact of Current Events

If any situation can be considered a business disruption, it is the economic impact of a near-total shutdown of our economy for several weeks. This and further disruptions caused as we recover supply chains, employee retention, and so many other areas.

But here is the key: If you don’t have an experienced M&A professional prepare your recasting for you, it might not be done adequately or thoroughly. As bad as that mistake was before COVID-19, it is far worse going forward.  

In a recent survey of business owners that we reviewed last week, nearly 40% expect their businesses to have revenue and earnings back to pre-lockdown levels within six months. If you fall into this group, and your original exit plans called for you to find a buyer in 2020 or early 2021, then you need to hire an M&A firm ASAP to get started on your business valuation and recasting.

This is true even if you are not fully able to account for your EBITDAC today. Since it takes 90-120 days to complete most valuations, your M&A team can begin gathering data to document the impact.

I know that for many of you, even as the economy begins to open up, that these are difficult times. The challenges that U.S. businesses have faced have been unprecedented over the past few months. However, it is never too early to begin considering your exit strategies and, as you do, remember how critical it may be to also take into consideration the impact that the Coronavirus has had on your business as well.

To learn more about recasting in general and about Generational Equity’s valuation and exit planning services, please call us at 972-232-1121, or use the following links:

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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