EBITDA growth since acquisition: separating performance from changes in basis

Consider an illustrative sale process. A buyer’s diligence team reviewing an acquired roofing brand asks one question: why has adjusted EBITDA risen $1.2 million since acquisition when the operating improvements management describes add up to $800,000?

Every figure in the answer may be correct. In the eighteen months since acquisition, the brand has priced better and installed more efficiently. It has also taken new add-backs, and the platform has changed how it allocates shared administrative costs. The financial statements reconcile throughout. But the reported growth now mixes performance with changes in how performance is measured, and the finance team has to separate them against a baseline set eighteen months earlier.

The brand was acquired at $3.0 million of adjusted EBITDA and reports $4.2 million today.

Exhibit 1. One brand’s EBITDA bridge since acquisition (illustrative)

$800,000 of the growth is operating improvement. The other $400,000 comes from add-backs and a change in allocation. That doesn’t make it inappropriate: the add-backs may be justified and the new allocation may better reflect how the brand uses shared services. But it needs a different assessment from pricing gains or lower costs, and the two changes raise different questions.

The $300,000 of new add-backs reconciles to the general ledger. That establishes where the expenses came from and that the arithmetic is right. It doesn’t establish that each add-back qualifies under every definition that uses it.

Exhibit 2. One set of add-backs, three answers (illustrative)

The same expenses support three different conclusions. For management reporting, $200,000 has an accepted basis. For the covenant, $100,000 meets the agreement’s terms. And $100,000 has not yet met the evidence or approval requirements for either. None of these is wrong; each depends on the definition being applied. How add-backs are reviewed between deals

The unresolved $100,000 needs a decision: more evidence, a revised treatment or exclusion. Until then the limitation should stay visible. A later period shouldn’t quietly turn it into an accepted add-back because it appeared in an earlier management schedule.

After acquisition, the platform moves from allocating shared costs on revenue to allocating them on headcount and usage of central services. The brand’s allocation falls by $100,000, and its reported EBITDA rises by the same amount.

The new method may be the better one, and the brand’s reported result is valid under it. But the brand didn’t earn an extra $100,000. The cost moved elsewhere in the platform, so consolidated EBITDA is unchanged. To compare the brand with its own acquisition baseline, the allocation has to be held on one basis. Both figures are legitimate. They answer different questions. Brand EBITDA as an allocation problem

Two assumptions sit under the analysis. First, the acquisition baseline needs no adjustment of its own. Second, the $200,000 of add-backs now accepted for management reporting falls in categories the definition used at acquisition did not permit, and no equivalent adjustment was made in the baseline. On those assumptions, the same brand has three growth figures, each correct under its own definition.

Exhibit 3. Three growth figures for one brand (illustrative)

• $1.2 million is the reported management-adjusted increase.
• $1.0 million is the growth with an accepted basis under the current management definition. It holds the allocation constant and leaves out the $100,000 of add-backs still awaiting a decision.
• $800,000 is the growth under the definition the baseline was set on. It also leaves out the $200,000 of accepted add-backs that definition did not permit, which makes it the like-for-like comparison with the brand as acquired. It is the operating improvement the diligence team asked about.

If the definition used at acquisition had permitted those categories, or the baseline had carried equivalent adjustments, the second and third figures would be the same. That is the point: which figure is right for a comparison depends on the definition each period was measured on, and that has to be on record.

These are brand-level sensitivities at an illustrative 8.0× multiple, as a buyer of this brand alone would see them. The $1.6 million is the gap between reported growth and growth with an accepted basis under the current management definition. The $3.2 million is the gap the diligence team asked about, between reported growth and growth on the definition used at acquisition. Neither is an effect on the platform’s consolidated enterprise value: the $100,000 allocation change moves cost between brands rather than removing it, so at platform level it nets out. And neither is a finding that the brand is overvalued. A buyer may accept some of the add-backs. It means the diligence team will ask which definition the value rests on, and the record has to answer.

A covenant-basis comparison is a separate calculation. It applies the credit agreement’s definitions to both the baseline and the current period, and the $100,000 of eligible add-backs can’t simply be substituted into the management bridge. Management-adjusted and covenant-basis EBITDA need their own support, and they shouldn’t be used interchangeably.

None of this analysis needs new software. A capable FP&A team can reconcile the statements, assess each add-back, document the allocation change and prepare each figure. The difficulty comes six months after the bridge is built. The brand has moved to a new accounting system. One add-back has been reconsidered. The director who prepared the reconciliation has left. A lender asks for support for the historical figures, including the definitions and add-back treatments that applied when they were issued.

The team may still be able to answer. But the answer now depends on reconciliation schedules, accounting memos, email and memory. Can it show the basis originally approved? Can it tell that basis from later revisions? Can it show which add-backs had been accepted at the time? A reporting process can be disciplined and still not keep who approved each change in basis, or when. The bridge needs both.

Goverisyn keeps the record behind the bridge: the baseline, the add-back decisions and the definitions it is measured against. The operating improvements are management’s to explain, and the analysis is finance’s to prepare.

• The entry baseline for each acquired brand is recorded with its basis and date.
• Each add-back is recorded as brands report it, with the reviewer’s classification against the approved criteria and its evidence. A reclassification is a new entry, and the earlier one is kept. Covenant eligibility is recorded separately, item by item, against the credit agreement’s own provisions.
• Each change to an approved definition is a new version, approved by the client’s named approver, with an effective date. Figures already issued keep the basis they were built on and are never overwritten. A comparable view prepared later, such as the like-for-like figure above, is a separate figure with its own documented basis and its own approval.

Change in EBITDA since acquisition is a measure in its own right, with its own approved definition. A brand is compared only where it has been owned for at least twelve months, has submitted every month since acquisition and has a recorded entry baseline. Otherwise it is listed apart with the reason, and nothing is estimated. Each figure carries its evidence state: Substantiated, Qualified, Limited or Not Available.

Goverisyn doesn’t decide whether an expense is truly nonrecurring or whether an add-back should be accepted. Those judgments stay with finance and the people authorized to make them. It doesn’t replace the work of lenders, buyers or advisers, and it doesn’t declare covenant compliance. Issuing figures remains the client’s act. When the question arrives, finance builds the answer from the record rather than from recollection. How definitions drift