The buyer is offering a high headline enterprise value but wants to redefine how EBITDA is calculated post-transaction to include a massive allocation of their corporate overhead. How do we structure the definition of adjusted EBITDA in the purchase agreement to prevent our post-closing rollover equity or earnout calculations from being artificially depressed?

Question

Tyler Smith · Accepted Answer

If your deal structure includes rollover equity or an earnout, the definition of EBITDA in the purchase agreement is critical. Buyers often try to load post-closing corporate overhead, such as management fees, shared IT costs, and executive salaries, onto your subsidiary's profit and loss statement to artificially depress your earnings and reduce your payout.

To protect your equity and earnouts, you must negotiate a precise definition of adjusted EBITDA that excludes these centralized allocations. Ensure the purchase agreement states that post-closing EBITDA will be calculated on a standalone basis, consistent with your historical accounting methodologies.

Specifically, you should negotiate the inclusion of several key protections:

- A complete exclusion of any corporate overhead charges or management fees from the parent company.
- A requirement that any transactions between your company and the parent entity must be conducted on an arm's length basis.
- A clause ensuring that any cost synergies achieved through consolidation are credited to your EBITDA calculation.

Use your V/TO® to align your leadership team on these financial boundaries. By establishing these post-closing governance rules early, you ensure that the operational efficiency you built is reflected in your final financial return, rather than being absorbed by the buyer's corporate cost structure.