Operational review and tax assessment guides EBITDA calculations and purchase price adjustment.
The client
$100 million door component company
Building products company; stamping and roll forming metal components for overhead door companies
Purchase price based on trailing 12 months (TTM) EBITDA
TTM EBITDA higher than historical trend
Raw material (steel) prices had risen dramatically during TTM
Largest customer in-sourced a major product line effective during nine months of the TTM period
The solution
Operational review to test company’s claim of being a low-cost producer
To calculate an adjusted, sustainable EBITDA:
Downloaded transaction database for the previous three years
Calculated portion of TTM profit due to "inventory profit" on rising raw material prices
Stripped out sales and product cost of lost sales
Using recurring sales only, recalculated revenue and COGS at prior year and current year steel costs to strip out the effect of material cost increases and related price increases to customers
Assessed tax opportunities
The benefit
Operational review showed efficient, lean manufacturing processes; identified and quantified some modest opportunities for improvement
Recurring activity recalculated at current pricing, and steel costs showed higher EBITDA than reported
Purchase price was supported by adjusted EBITDA calculations
Acquisition lenders satisfied that adjusted EBITDA would support new debt structure
More than $1 million tax savings identified through proper structure of transaction