Pro forma EBITDA

Pro forma EBITDA is a group’s EBITDA recalculated on its new scope, as if an acquisition or a disposal had taken place on the first day of the twelve-month period used. It serves to size the debt of an acquisition financing and to test the covenants during the year following an external growth transaction. The Loan Market Association model agreement provides for it in the definition of adjusted EBITDA: the EBITDA of the acquired company is added and that of the company sold is removed. When closing falls during a financial year, the agreement specifies how the tests of the first year are calculated, either by linear extrapolation or with a pro forma EBITDA agreed before closing. ECB Banking Supervision asks that leverage measured at origination be based on the pro forma financial statements of the combined entity resulting from the transaction. In 2018 it noted that optimistic adjustments to pro forma EBITDA made actual leverage well above reported leverage. Borrowers ask to add the synergies expected from the acquisition. Lenders ask in return that integration costs be taken into account. For you, the calculation method sets the debt available for an acquisition and the covenant headroom in the quarters that follow.

A group generates €18m of EBITDA over twelve months and, during the year, buys a company that generated €6m of EBITDA over the same period. Its pro forma EBITDA reaches €24m. With €100m of debt after the acquisition, pro forma leverage comes out at 4.2x, compared with 5.6x on reported EBITDA.

• The reference period and the date on which the acquisition is deemed to take place.
• The source of the target’s EBITDA: audited accounts or due diligence report.
• The treatment of synergies and integration costs.
• The method for calculating the tests of the first year after closing.