Factoring Fees EBITDA adjustment?

searcher profile

May 20, 2024

by a searcher from Georgetown University in Brooklyn, NY, USA

Hey! I'm looking at a deal where the seller is attempting to use "Factoring Fees" as an adjustment to EBITDA. This doesn't seem appropriate to me, because they spent money to turn some of their A/R into cash...and they did it two years in a row. Any thoughts on this?

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
^redacted‌ thank you for the tag. Great comments already made above. From a lending perspective factoring fees can be added back if you do not plan to factor going forward and you can prove you do not need to factor. I have seen many cases where factoring has become necessary to fund growth or due to a seller pulling too much cash out of the company but factoring may not be needed as a permanent solution. However, if factoring fees are being added back you need to be sure you really understand the cash flow cycle and that there is adequate working capital remaining in the deal at closing and/or you are funding adequate working capital so you will not need to factor going forward.

Please keep in mind, most good factoring companies will not factor for you if you have other debt that has a first lien on all of your business assets. So if you get acquisition debt and find you do not have adequate working capital post closing, you likely would not be able to factor at a later date unless your senior lender releases your accounts receivable to allow you to do so. So you have to be extra cautious and be sure you have adequate working capital at closing to support operations as you may struggle to get it later or you may have to pay a really large price to get it later. A QofE should tell you how much working capital you need. You can also use some cash flow models to predict working capital needs. If you need any assistance you can reach me here or directly at redacted Good luck.
commentor profile
Reply by a searcher
from University of Pennsylvania in Miami, FL, USA
There are some companies that depend on factoring to fund operations. These businesses have a cash flow cycle such that, short of maintaining a massive cash stockpile, simply wouldn’t be able to operate. In my view this should be treated as an operating expense and not excluded from the EBITDA calculation. But this isn’t just my personal opinion—GAAP classifies any sort of expense related to receivable financing as an operating expense. ASC Topic 860 on Transfers and Servicing covers this if you are really eager to dig into it, as I once did when working on a deal.

Bottom line from my perspective is that if you value a business based on an EBITDA multiple that excludes factoring expense for a business that cannot live without it, you are in for a world of pain and regret. So regardless of what some seller or seller’s banker tries to convince you, just say no.
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