Sales and marketing

Coronavirus and Business Valuations: A New Metric Emerges?


Unquestionably, the COVID-19 pandemic has negatively affected all aspects of our lives. In the business community, revenues, earnings, and valuations have plummeted affecting governments, most businesses, and individuals alike. As both public and privately held companies search for additional debt capacity and/or potential buyers, the COVID-19 pandemic has and is affecting debt terms and availability, company valuations, and purchase prices paid for companies.

Author: Gary Miller
Author: Gary Miller

As a result of this current environment, a new financial metric for measuring financial performance has been created. It is called EBITDAC (Earnings Before Interest, Taxes, Depreciation, Amortization, Coronavirus/Covid-19) or Adjusted EBITDAC.

Companies have always tried to flatter their financial performance and earnings by using various accounting treatments. So, creating a new financial performance metric, EBITDAC, is no surprise. Currently, a great deal of discussion and controversy among the largest investment banks, accounting firms,  and financial centers is being debated as to whether this new, non-GAAP (Generally Accepted Accounting Principles) metric is appropriate during this pandemic crisis.

EBITDA discussion

For privately held business owners seeking to sell their companies for the most profit, it is critical that they understand the accounting principle EBITDA. EBITDA is what some advisors call a pure measure of operating profits. Investors looking to invest/or purchase a company, analyze and compare one company’s EBITDA to another. The higher a company’s EBITDA, the higher the valuation of the company.

The EBITDA formula is simple. Start with the net income number, found on the Income Statement, and add to it interest expenses, taxes (federal and state income taxes only), depreciation, and amortization. These add-backs increase the profitability of the company’s operating performance. EBITDA levels the playing field when comparing companies because various companies will have more or less in interest expense, depending on their debt levels. The same is true for taxes, depreciation,  and amortization since taxes vary substantially from one state to another,  and depreciation and amortization schedules vary as well, depending on a company’s capital purchases. Therefore, earnings can be distorted from one company to another if the EBITDA formula is not applied correctly. It is important to remember that interest, taxes, depreciation, and amortization are true operating expenses for any company.

Adjusted EBITDA discussion

Most company owners that are planning to sell their businesses should engage a professional M&A firm or an M&A consultant to help them recast their past five years of P&L statements, balance sheets, and three to five years of proforma statements. This step is taken to provide potential buyers with both the synergies and potential future earnings of the company. Adding back any one-time-only expenses, extraordinary expenses or personal expenses paid by the company that is tangential to the company’s operations will certainly add to the profitability of the company and to its valuation. Some examples of add-backs include:

  • Business disruption losses beyond your control (fire, floods, earthquakes, tornadoes, and tsunamis);
  • Extraordinary legal expenses due to a lawsuit;
  • Cars, boats, planes expensed through the business for personal use;
  • Memberships to country and yacht clubs and gyms for personal use;
  • Equipment replacement, repairs, and renovations;
  • Owner’s compensation or compensation to family members above market rates;
  • Payroll expensed through the company for inactive employees or children;
  • Travel vacations for you and your family that are not related to the business;
  • Losses due to employee embezzlement; and,
  • Payroll expenses including healthcare, life insurance, and retirement for the owners.

These add-backs are added to the EBITDA calculations and are labeled Adjusted EBITDA.

EBITDAC discussion

Certainly, the current pandemic situation can be considered a business disruption, since most small and large businesses were near a total shut down ordered by the government. A strong argument can be made that significant profit losses would not have occurred had it not been for the pandemic shutdown. The key is to precisely identify earnings’ losses that can be directly attributed to the pandemic that would not have occurred had the pandemic not struck. Such examples include, among others:

  • Supply chain interruptions;
  • Employee retention;
  • Loss of customer purchases that can be authenticated from past purchase behavior; and,
  • Loss of customer traffic due to “stay at home” orders.

When examining the addition of “C=coronavirus to EBITDA, the earnings of the company could be significantly increased. Remember, those companies that are reporting EBITDAC are adding back “supposed” or “estimated” earnings that never happened. And, at best, the earnings add-backs are anyone’s estimates as to what they could have been. For example, this month Schenk Process, a German measuring instrument manufacturer owned by Blackstone, used this new performance metric, EBITDAC, in its first-quarter 2020 quarterly report, (the C is for coronavirus). According to Covenant Review, a financial research firm, The Azek Company, a Chicago-based manufacturer of building products, raised $325m of junk bonds. It used the term that would allow it to add back “lost earnings” as a result of Covid-19. That was a first for the corporate debt market.

The problem is, how does anyone know what the true earnings might have been if COVID-19 had not come about. By contrast, using the EBITDA formula without the “C”, adds back expenses that really took place. There are no estimates or guesses. The added back expenses are taken directly from the company’s income statement for a specific reporting period.


While many businesses will never recover, many will; therefore, they will look to justify earning losses due to the effects of COVID-19 when trying to sell their companies. Whether they add the “C” to EBITDA or the “C” to the Adjusted EBITDA, it is critical that business owners gather data and documentation that will strongly support this controversial accounting metric to persuade buyers that their company’s pre-pandemic valuation is the same as it will be post-pandemic.

Gary Miller ([email protected]) is the CEO of GEM Strategy Management Inc., an M&A consulting firm advising middle-market private business owners. Read more of Miller’s blogs here.