EBITDA comparability across portfolio companies
By Derwin Lucas ·
EBITDA comparability across portfolio companies means every brand’s EBITDA is stated on the same basis: the same treatment of shared-service costs, the same classification of commissions, financing fees and rebates, and the same rules for adjustments. Without that basis, the gap between two brands’ EBITDA can be a gap in accounting choices rather than in profitability.
This guide covers where brand EBITDA diverges, what each divergence is worth, and how to establish one basis without replacing anyone’s accounting system. All figures are illustrative.
Why brand EBITDA rarely compares at face value
Brand EBITDA is the sum of many classification decisions, and acquired companies made those decisions before you owned them.
Each brand closes its books in its own system, under its own chart of accounts, with its own habits. Three choices do most of the damage: whether the brand carries its share of shared-service costs, where it books costs such as commissions and financing fees, and what it proposes to add back. Two brands can report the same EBITDA margin while making opposite choices on all three. The portfolio total still adds up correctly. Every brand’s figure is right on its own terms; the terms are what differ.
Shared costs
Shared-service costs are one of the most common reasons one brand’s EBITDA looks better than another’s.
In one illustrative case, a brand reports EBITDA of $1,500,000 before its $150,000 share of shared-service costs. On the portfolio basis, which requires the allocation, its EBITDA is $1,350,000: 10% lower, with nothing changed in the business. See the overhead allocation case →
Across a portfolio the effect compounds. In an illustrative 25-brand portfolio, eight brands that each leave out about $150,000 of shared costs look $1.2 million more profitable than the brands that carry them, for a definitional reason, not an operating one. How to make brand EBITDA comparable →
Classification
The same cost can sit above gross margin, below it, or outside a measure entirely, depending on how the brand books it.
- Commissions, financing fees and installation labor. Where these are booked can put one P&L’s gross margin anywhere from 29.9% to 62.0%. See the arithmetic →
- Financing dealer fees. $10,000,000 of financed sales at a 2.5% dealer fee is $250,000 of cost, and it is missing from contribution margin at any brand that leaves it out.
- Callbacks and warranty. Across 500 jobs at $400 each, $200,000 of callback and warranty cost is missing from reported job margins.
- Vendor rebates. A rebate that has been negotiated is not one that has been earned, accrued or received. Count each stage for what it is.
Adjustments
Adjustments deserve the closest scrutiny, because valuation multiplies every dollar of them.
At an illustrative 8.0× multiple, $600,000 of recurring costs presented as adjustments puts $4.8 million of implied enterprise value at issue. The question is not whether the arithmetic is right, but whether those costs qualify as adjustments at all. A recurring cost added back also flatters the trend: it returns the following year, and the apparent improvement reverses. How adjustments are reviewed between deals →
Profitability is an operating result. Comparability is a definitional one.
How to establish EBITDA comparability
Set one portfolio basis, restate each brand on it where the records allow, and keep the basis with every figure.
1 · Write down the portfolio basis
Decide, once, how shared costs are allocated, how each contested cost is classified, and what qualifies as an adjustment.
Cover the items that move EBITDA most: shared-service allocation, commissions, financing fees, rebates, callbacks and warranty, and the criteria an adjustment must meet. Version the basis, so a change is recorded rather than silently applied to past months.
2 · Restate each brand on that basis
Where a brand’s records allow, restate its EBITDA under the portfolio basis; where they don’t, say so.
A brand that books commissions in cost of goods can be restated if its P&L shows them as a separate line. A brand that reports cost of goods as a single figure can’t be split after the fact, so its EBITDA is reported with that limitation stated, not adjusted by estimate.
3 · Review adjustments as brands report them
Classify each proposed adjustment against the documented criteria every month, not only when a deal is in diligence.
Keep the supporting evidence and the decision with each adjustment, and keep accepted adjustments apart from rejected or unresolved ones. By the time a buyer’s quality-of-earnings review tests the figure, it has already been reviewed.
4 · Keep the basis with the figure
Every brand and portfolio EBITDA figure should carry its method, the brands and period it covers, and the source amounts behind it.
That is what lets the figure answer "where did this come from?" when a lender, a board or a buyer asks. A covenant calculation in particular should state which brands and adjustments it includes. A brand whose P&L hasn’t arrived is stated as missing, never filled in.
Who owns the basis
The portfolio basis is a finance decision: the CFO should approve it, and FP&A should apply it.
Brand controllers know how their own books are built, so they should document where their practice differs from the basis. The operating partner knows which figures the sponsor relies on, and those are the ones the basis must cover first. Record who approved each version of the basis and when, so a change agreed in March can’t quietly restate January. Goverisyn doesn’t set the basis; your leadership does.
Reported and adjusted, side by side
Show reported and adjusted EBITDA together, with each adjustment traceable, so a reader can see exactly what the adjustments add.
A single adjusted figure hides the decisions inside it. Side by side, the gap between the two is the sum of named, reviewed adjustments, and a reader can challenge any one of them. In Goverisyn, every figure carries an evidence state: Substantiated, Qualified, Limited or Not Available. What each state means →
Where to start
Start with shared-cost allocation: it touches every brand, and the method only has to be agreed once.
Agree the allocation method, apply it to every brand, and see how each brand’s EBITDA changes. Then take classification and adjustments in turn. Goverisyn’s Portfolio Measurement Review does this across selected brands. The first step is a free 60-minute Portfolio Review, which needs no data in advance. For the same approach applied to operating KPIs, see How to compare performance across acquired companies.
Start with a Portfolio Review.
60 minutes. No data needed in advance.
By Derwin Lucas, founder of Goverisyn, with nearly three decades in management and information systems in home services. Published . About Goverisyn →