Valuations, Covid-19 and EBITDAC adjustments

The impact of the pandemic has been felt in many ways, and one of these is in relation to valuation approaches for businesses. This blog will give an overview of how buyers and sellers of companies are trying to factor in Covid-19 factors accurately and fairly.

In general terms, EBITDA is applied to a valuation multiple to form the headline valuation of a business. Net cash/debt and working capital adjustments are then applied to provide the valuation of the business. Hence growing EBITDA normally leads to a higher valuation.  

Corporate finance advisers usually adjust EBITDA to derive the underlying position. This means adjusting for one-off costs and income (although the latter is usually rare!), both of which can become highly subjective.

It is therefore important to note that if you are considering selling your business, the profitability used to value your business could be significantly different to the profitability in your recent financial statements.

Typical one-off costs would include excessive repairs and renewals, short term loss making contracts, above market rate directors remuneration etc. One-off income would capture items such as grant income, or the profitability arising from short term, non-recurring turnover. But, as noted above, the adjustments are often highly subjective, and many other items can be included.

Whilst some sectors have benefitted, Covid-19 has adversely impacted many businesses, and the impact of further lockdown measures announced in January 2021 means that the effect will continue to be felt well into the year and for some, very possibly, long beyond this year.

Therefore, the impact of Covid-19 could be a significant add back adjustment for many companies when assessing their underlying ‘true’ EBITDA. Hence the adjustments made to reflect the impact of Covid-19 have had, and will continue to have, a significant impact on valuations and transaction values across many sectors. The impact of adjustments for Covid-19 has led to the acronym EBITDAC.

EBITDAC (Earnings before interest, tax, depreciation, amortisation and the effects of Covid-19) has become an often used term in corporate finance transactions since the Covid-19 pandemic started.

It is important that any adjustments to the EBITDA can be clearly justified. Hence business owners need to be aware that whilst Covid-19 add backs can be significant, the “C” adjustment must be clearly justified.

Without this, acquirors are unlikely to fully accept such adjustments, with an adverse impact on business valuations.

To have any significant adjustments accepted by an acquiror, there will be a requirement for the adjustments to be clearly analysed and quantified. To do so usually requires good quality management information systems, which provide sufficient granularity to enable one off costs to be identified and quantified as they arise.

Management should consider also formally capturing Covid-19 impacts in monthly management accounts and board packs (along with other add backs and adjustments).

The typical Covid-19 adjustments we are seeing include the following:

  • extra facilities management costs such as cleaning
  • lost or deferred income due to work being postponed due to lockdown measures
  • redundancy costs
  • additional advisory fees, for example in relation to furlough arrangements

Of course, each business is different and in many ways unique; but if you are thinking of selling your business, or any of the issues highlighted are relevant to your business, please don’t hesitate to get in touch to discuss further with our Corporate Finance Senior Manager, Ian Waddingham on 01772 821021 or