Legal Blog

M&A Nugget: Earnings Smooth-Out

Last week’s nugget discussed the most common appraisal methods used to value a target.  One of those methods is the capitalization of EBITDA.  In calculating the target’s earnings that will be used to determine value, buyers and appraisers typically smooth-out earnings, that is, re-compute earnings to eliminate nonrecurring or extraordinary items.  One of the most common adjustments made to earnings is to add back the excess of actual owner compensation over what would be standard compensation paid to a person with the owner’s responsibilities.  Casualty losses in a business that do not routinely suffer those losses are often added back to earnings.  Unusual litigation with high cost may also be added back.  Certain items may be deducted from earnings.  For example, manufacturers’ rebates substantially higher than the historical norm may be deducted from earnings.  It is important for both sides in a transaction to understand the smooth-out process for earnings, so that they will have a realistic expectation of value.

 

 

If you have any questions about this or any other M&A issue,
please contact Glenn Solomon at gsolomon@offitkurman.com or 443-738-1522.

 

ABOUT GLENN D. SOLOMON

gsolomon@offitkurman.com | 443-738-1522

Glenn D. Solomon is a principal at Offit Kurman and has provided counsel to businesses and business owners for more than twenty-five years. He has extensive experience in the purchase and sale of businesses, structuring ownership agreements, and advising companies in financial distress.

 

 

 

 

 

ABOUT OFFIT KURMAN

Offit Kurman is one of the fastest-growing, full-service law firms in the Mid-Atlantic region. With over 130 attorneys offering a comprehensive range of services in virtually every legal category, the firm is well positioned to meet the needs of dynamic businesses and the people who own and operate them. Our ten offices serve individual and corporate clients in the Maryland, Delaware, New Jersey, and Northern Virginia markets, as well as the Washington DC, Baltimore, Philadelphia, and New York City metropolitan areas. At Offit Kurman, we are our clients’ most trusted legal advisors, professionals who help maximize and protect business value and personal wealth. In every interaction, we consistently maintain our clients’ confidence by remaining focused on furthering their objectives and achieving their goals in an efficient manner. Trust, knowledge, confidence—in a partner, that’s perfect.

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