How to maximize the value of divestitures

In sell-side M&A, consider pro forma EBITDA adjustments

When a company decides to divest an asset or pursue an outright sale, chances are good that the sale process will attract multiple bidders. From a seller’s perspective, the top priority should be how to elicit the best possible price from all bidders competing for an asset. As straightforward as this may sound, sellers today are neglecting business process improvement opportunities that could move them meaningfully toward this goal.

In sell-side M&A, even when the timeline of a sale or divestiture is more compressed, sellers will want to examine ongoing business improvements and highlight them. The impact of such changes can be annualized as pro forma EBITDA adjustments and then properly substantiated and presented to potential bidders.

Boosting divestiture value with pro forma EBITDA adjustments

Why pro forma EBITDA?

Buyers, particularly private equity firms, are searching for value creation opportunities to help support more competitive bids, and that’s what pro forma EBITDA represents. Buyers today are compelled to put a value on such measures to boost their chances of success. Recognizing this, sellers need to be proactive. They should develop their own estimates of pro forma EBITDA adjustments that could potentially be extracted from the business being sold.

Highlighting value creation opportunities in sell-side M&A

  • Planned marketing of the asset is four to 12 months out: Sellers should use this time to identify and initiate new business process improvements that can favorably impact results.
  • One to three months remain before marketing: Sellers should identify existing business process improvement efforts the company is undertaking, based on information and data about the business and operations.

In both cases, sellers will calculate the impact of these business initiatives as pro forma EBITDA. When there is only a partial-year impact on the profit statement from new or ongoing business changes, pro forma EBITDA can be annualized. 

The quality of earnings report needs a clear narrative, detailed cash flow models, and other forms of substantiation to qualify the pro forma EBITDA adjustments. Articulating a track record of successful execution on prior cost reduction or process change efforts will help boost confidence that management can deliver on the pro forma EBITDA post-close. 

Proper substantiation of these pro forma EBITDA numbers will be key, giving potential buyers greater confidence that they can accept the adjustments as the basis for higher bids.

Download our report to see how even small adjustments to pro forma EBITDA can have a significant impact on the sale price for a company or divestiture.

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