Relation EBITDA, debt and NWC
After reading about EBITDA adjustments, cash- and debt- like items and net working capital you might think that all items are separate and not linked or related to each other. However, it is important to understand that all adjustments are linked and how you treat something in EBITDA impacts how you need to treat it in working capital as well.
Debt or working capital
When looking at your balance sheet, accounts can either be cash-, debt-like or they can be part of net working capital. Meaning, if you treat certain balance sheet items as cash-like or debt-like these items need to be excluded from net working capital (both from the calculation of the normalized target level amount as well as working capital at Closing). Yes, this means you need to calculate that same adjustment for each month in the last 12 months if your net working capital target is based on the last 12 months.
Operational or non-operational
If you adjust certain items from EBITDA for being non-operational or non-recurring, the open balances related to these items need to be excluded from net working capital as well. In other words, the open balance on your balance sheet of these items need to be considered cash-like or debt-like. For example, if you consider severance payments for fired employees as non-recurring and you adjust those costs back to EBITDA, any open payable at Closing related to this severance needs to be added to net debt. When you determine adjustments always think about what impact they have on EBITDA and debt / cash.
Take into account that EBITDA adjustments are multiplied against the multiple and always have a bigger impact on the purchase price. Whereas adjustments in net debt are Dollar for Dollar and the impact is limited to the open balance as of Closing.
Find more on:
- Adjusted EBITDA and EV to equity value bridge
- Free M&A Excel templates for download
- Normal level of net working capital at Closing
- Locked box versus completion accounts
- Choosing and preparing a virtual data room