What is an 'EBITDA add-back' and which typical add-backs are negotiated?
EBITDA add-backs are adjustments that lift "reported EBITDA" to a higher "pro-forma / adjusted EBITDA." They are negotiated between sponsor and lender and capped in the credit agreement at a percentage of reported EBITDA.
Senior Debt / adjusted EBITDA is the pricing driver for the leverage discussion with the lender. Every $1 of EBITDA in accepted add-backs typically allows ~$5 more senior debt capacity. Senior bankers scrutinize the stack — whatever is not accepted drops out of adjusted EBITDA.
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| Category | Example | Typical cap | Lender skepticism |
|---|---|---|---|
| One-time effects | Restructuring, M&A costs | 25% | low |
| Synergies (cost savings) | Run-rate from a program | 20% | high — look-forward |
| Run-rate effects | Contract increases | 15% | medium |
| Pro-forma acquisitions | Target's LTM EBITDA | uncapped (case-by-case) | low if audited |
| Pension holiday cost | Normalized contributions | 10% | medium |
| Item | Value |
|---|---|
| Reported EBITDA | $40m |
| + Restructuring | $5m |
| + Synergies (run-rate) | $8m |
| + M&A adviser fees | $3m |
| + Pro-forma bolt-on EBITDA | $6m |
| = Adjusted EBITDA | $62m (+55%) |
Synergies are often booked by the sponsor at 100% — lenders usually cut 30–50%. No lender accepts run-rate add-backs without a clear realization clause and a time limit.
Question: "Which add-back is the most controversial?"
Answer: "Synergies. Look-forward, burden of proof on the sponsor. With a DD report and a clear realization plan, 60–80% is acceptable. Without a plan, more like 30–50%. In the middle market it is often the decisive negotiation point"