As If Pronouncing EBITDA Wasn't Hard Enough, We Now Have EBITDAC

The novel Coronavirus's impact has been felt in companies large and small across the globe as business has been curtailed and economies have slowed.

In mid-April, Benchmark International published a blog article outlining some of the recommendations made to clients to record the pandemic's financial impact in order to readily identify any expenses or losses that arose as a consequence of this one-off event.

Whilst suggesting it would be naive to advocate that these non-recurring expenses, or losses, directly attributed to the effects of the COVID pandemic could simply be written out, it was evident that negotiations were bound to include provisions for such abnormalities. The natural consequence of isolating these abnormalities would be that value could be preserved. However, one could expect deal structures to include deferred compensation - or earn out provisions - that will be triggered when the business demonstrates a return to prior performance and a resilience to the COVID impacts.

Just a few short weeks later, a new acronym has emerged (as the financial sector always loves a good acronym) EBITDAC - the normalised Earnings calculated Before Interest, Tax, Depreciation, Amortisation, and Coronavirus.

At this early stage, this metric has only been adopted by a small number of European corporate companies to present a basis for the amount of debt they should be allowed to raise. Led initially by German manufacturer Schenk Process (owned by the US private equity firm Blackstone) and Chicago based building supplies firm Azek Corporation, the development certainly bodes well for M&A where corporate companies and private equity firms alike have formally recognised such adjustments and are thus likely to be open to negotiating value, subject to appropriate structuring of transactions.

Whilst not known for lightheartedness, it's an area where the industry has been able to poke a little fun at itself. Sabrina Fox, executive adviser at the European Leveraged Finance Association, commented on an item in the Financial Times, "It's a bit ironic to say we're adding back the effects of Coronavirus to deal with the effect of Coronavirus"!

Regardless of the diverse commentary surrounding this new metric, the reality exists. This one-off event has left a few companies untouched with certain sectors receiving significant boosts, and others impacted negatively. The factors attributable to the pandemic cannot be discarded or ignored, and diligent negotiation on issues related to it will be integral to any deal.

Author
Andre Bresler
Managing Partner
Benchmark International

T: +27 (0) 21 300 2055
E: Bresler@benchmarkintl.com

Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com

Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com

Europe: Michael Lawrie at +44 (0) 161 359 4400 / Enquiries@BenchmarkIntl.com

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Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $6B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from 12 offices across the world, have assisted hundreds of owners with achieving their personal objectives and ensuring the continued growth of their businesses.

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