Module IV· Cash FlowIntermediate
Question
What is 'run-rate EBITDA' and why do sponsors use it in a pricing negotiation?
Answer
Mechanics
Run-rate EBITDA = annualized current performance, often based on the last 3-6 months × 4 or × 2.
Deep diveShow more details
Comparison (LTM vs run-rate)
| Aspect | LTM EBITDA | Run-rate EBITDA |
|---|---|---|
| Time window | last 12 months | last 3-6 months annualized |
| Distortion risk | low (smoothed) | high (seasonality, one-offs) |
| Seller's argument | "conservative" | "the current strength of the business" |
| Buyer's position | wants to see LTM | accepts run-rate only with adjustments |
Consequence
Run-rate is usually 5-15% higher than LTM, because sellers typically present it during growth periods. In the middle market it is often presented as 'pro-forma EBITDA'.
Common pitfalls
- Seasonality ignored (construction Q3 is not representative)
- One-off contracts counted as recurring (software licenses)
- The quality-of-earnings report scrutinizes exactly these assumptions
Pitch tip
In a pricing negotiation many sellers say 'But run-rate is 15% higher than LTM.' — the clean buyer response: 'We take LTM as the pricing basis; we accept run-rate only if QoE confirms the sustainability of the one-off items.' A classic negotiation position.