Adding assets recently purchased as an addback, reasonable or unreasonable?

October 07, 2021

by a searcher in Redondo Beach, CA, USA

Speaking to a trucking company. They recently bought a few trucks, in cash, worth $500k total. So they added back that amount to an EBITDA of $500k which equates to an overall $1 million in SDE for the current TTM. How should one think about modeling this into a valuation? To me, if the value of the assets (trucks) are still worth the $500k and there are potential depreciation advantages in the near future, it may be fair to model in the $500k. I want to make sure I'm being fair to the seller but also looking out for my best interests. Thoughts welcomed?

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Reply by a searcher
from Dartmouth College in Hanover, NH, USA

Building on Sam Hogan's comment - the trucks are an asset and will ultimately generate revenue and earnings (whereby contributing to EBITDA). Are the trucks additive to the fleet? Or replacing old trucks? I would first want to understand how the new trucks will contribute to the top line and then understand how that translates to EBITDA. The earnings from the new trucks will ultimately be reflected in projected cash flows, which you would use to value the business. And to the extent there is significant visibility into earnings from the new trucks (e.g., contracted routes, etc.), you could add that back to EBITDA, but that would depend on your level of confidence in management's estimates (especially when they're positioning to sell and would benefit from inflated EBITDA). If you do go this route, I would aim to establish a more conservative pro forma "run-rate" adjusted EBITDA for the business that takes into account say 6-12 months of projected EBITDA contribution from the new trucks.

You should definitely not add back the $500k, which to other comments above is capex not earnings. Depreciation is not relevant here / will never impact EBITDA, since by definition it is added back.

Reply by a searcher
from University of Florida in Miami, FL, USA

Plenty have touched on this, but in essence, in buying the truck in cash, the seller has made a capital structure decision, but unless he somehow purchased it well-below market, he hasn't altered the business' value (for better or worse). If these are operating assets that the company will need to operate one way or another, you do not want to give them "full credit" for the purchase via add-back and purchase on that multiple, while disregarding the fact that the business would need these assets and would use up cash flow in acquiring them (whether buying flat out or financing). To reach a fairer valuation, you can add back the purchase cost to SDE and then adjust SDE for the implied "steady-state" cost of the PPE (i.e. assume you would buy the truck and pay for it over a certain period of time), which could get you to a more fair valuation.

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