Confused about EBITDA calculation

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January 12, 2021

by a searcher from Full Sail University in Milwaukee, WI, USA

This is from an offering memorandum provided by the broker. It appears he's calculating EBITDA by adding interest, depreciation and amortization to the 'ordinary income' line. Am I misunderstanding something? By definition, that seems to be very much not the EBITDA.


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commentor profile
Reply by a searcher
from Washington University in St. Louis in Denver, CO, USA
I think you should definitely request the details/excel behind this to confirm what accounts are included where (including how much of Rent is being allocated to COGS vs. OpEx) and the details of the SDEs (to make sure they are actually SDEs and not business expenses). To me as shown, operating expenses look light (of course maybe that makes sense with the business you are looking at), but some quick math below:

Total Operating Expenses Shown $666,500
Less: SDE (assuming all hitting OpEx) $(341,610)
Less: Rent (assuming all hitting OpEx) $(117,340)
Less: Interest (Added Back) $(13,250)
Less: D&A (Added Back) $(60,000)
Other Operating Expenses (Incl. Headcount) $134,300

I'm probably missing something but it seems very low to me as it should include all other expenses (any other opex headcount/business insurance/IT costs/marketing/etc.) and for any business you are going to try to grow it doesn't seem like there is much there for you to start with
(again may be right depending on business you are looking at).
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Reply by a searcher
from University of Western Ontario in Toronto, ON, Canada
This methodology of calculating EBITDA is meant to show a more "normalized" earnings approach by not including expenses shown below NOI (which are typically added-back anyways) - which is also theoretically why finance professionals use EBITDA in the first place i.e. to get a closer proxy to cash flow - However, I would still ask for a detailed line-by-line income statement because sometimes brokers like to classify certain expenses as non-recurring or extraordinary when they really are not.
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