Run-rate EBITDA adds the part of each initiative the trailing twelve months do not yet show; the buyer then decides how much of it to believe.
Run-rate EBITDA is last-twelve-months EBITDA plus, for each initiative already in place, its full annual impact less the part the twelve months already contain. On an illustrative exit, 40.0 of LTM EBITDA and three actioned initiatives give a run-rate of 44.17; the seller's deck, which also counts a planned fourth, shows 45.67 of run-rate EBITDA, of which a buyer credits 42.95. At 11.0 times that is 29.9 of enterprise value between the seller's deck and the bid, 8.5 per cent of the seller's equity.
Worked in full in The Private Equity Operating Partner by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
An illustrative portfolio company is being prepared for sale on accounts to 31 December. LTM EBITDA is 40.0, the expected multiple 11.0 times, net debt 150. The operating team has four initiatives in the plan, started at different dates. Figures in millions.
| Initiative | Annual impact | Months in LTM | Buyer credit |
|---|---|---|---|
| Headcount reduction, actioned 1 September | 2.4 | 4 | 90% |
| Procurement contract, signed 1 October | 1.2 | 3 | 75% |
| Price increase, effective 1 November, net of churn | 2.0 | 2 | 50% |
| Site consolidation, planned, not actioned | 1.5 | 0 | 0% |
The credit percentages are illustrative, but the ranking is how evidence works: a saving visible in two months of payroll is close to fact, a signed contract slightly less, a price increase depends on how many customers stay, and a plan is a plan.
Realised in LTM = annual impact × months in effect / 12
Run-rate adjustment = annual impact − realised in LTM
Run-rate EBITDA = LTM EBITDA + Σ run-rate adjustments
Buyer EBITDA = LTM EBITDA + Σ (adjustment × credit)
In Excel, with annual impact in C, months in D and credit in E: =C5-C5*D5/12 for the adjustment and =(C5-C5*D5/12)*E5 for the credited amount.
| Initiative | Realised | Adjustment | Credited | Value at 11.0x claimed | Value credited |
|---|---|---|---|---|---|
| Headcount | 0.80 | 1.60 | 1.44 | 17.6 | 15.8 |
| Procurement | 0.30 | 0.90 | 0.67 | 9.9 | 7.4 |
| Price increase | 0.33 | 1.67 | 0.83 | 18.3 | 9.2 |
| Site consolidation | 0.00 | 1.50 | 0.00 | 16.5 | 0.0 |
| Total | 1.43 | 5.67 | 2.95 |
| Basis | EBITDA | Enterprise value | Equity |
|---|---|---|---|
| LTM as reported | 40.00 | 440.0 | 290.0 |
| Run-rate, actioned items only | 44.17 | 485.8 | 335.8 |
| Seller's run-rate, with the planned item | 45.67 | 502.3 | 352.3 |
| Buyer's credited run-rate | 42.95 | 472.4 | 322.4 |
The adjustments add 14.2 per cent to LTM EBITDA; the buyer accepts 52.0 per cent of them. The 29.9 of enterprise value in dispute is entirely equity, so it is 8.5 per cent of the seller's equity and a larger share of the gain over the hold. That is the number to negotiate, and the evidence pack is the only argument that moves it.
The planned site consolidation is the costliest line in the deck and the cheapest to concede: 16.5 of claimed value that no buyer pays for. Strictly it is not run-rate at all, since nothing has been actioned: on the definition above the run-rate is 44.17. Either action it before the LTM date or present it as upside for the next owner, where it supports the multiple instead of inflating the EBITDA.
The price increase is the item most open to argument, because its value depends on churn after the sale. Holding the other credits:
| Credit on price increase | Buyer EBITDA | Enterprise value | Equity |
|---|---|---|---|
| 0% | 42.12 | 463.3 | 313.3 |
| 25% | 42.53 | 467.8 | 317.8 |
| 50% | 42.95 | 472.4 | 322.4 |
| 75% | 43.37 | 477.0 | 327.0 |
| 100% | 43.78 | 481.6 | 331.6 |
Each 25 points of credit is worth about 4.6 of value. Six months of volume data after the increase, showing churn at or below plan, is the cheapest way to move along this table. Alternatively, wait: if the three actioned items deliver, LTM to 31 October, ten months on and the first date at which the price increase has a full year in the accounts, is 44.17, worth 13.4 more than the buyer's current view, before the cost of holding longer and the risk that something slips.
The most frequent error is adding the full annual impact to LTM instead of the unrealised part. Here that gives 47.10 instead of 45.67: the 1.43 already in the LTM is counted twice, worth 15.8 of claimed value that a buyer's accountant will remove in the first week, at a cost to the seller's credibility on every other line. The second error is presenting run-rate on cost savings without the costs that achieve them: severance, the new contract's onboarding, the volume lost to the price rise. Run-rate is a net figure or it is not run-rate.
Add, for each actioned initiative, the annual impact less what the LTM already shows, then weight each line by its evidence. Here the deck's 45.67 of run-rate, 44.17 on actioned items alone, becomes 42.95 in the buyer's model, and the gap is worth 29.9. The book's Vireo case, where run-rate EBITDA at exit meets a buyer who credits only part of it, is in the free workbook and cases for this book. For how add-backs translate into leverage turns, see what an add-back bridge is worth; for where the uplift sits in the value bridge, how to split EBITDA growth and multiple expansion.
LTM is the trailing twelve months as reported. Pro forma adjusts it for events such as acquisitions as if they had happened at the start of the period. Run-rate adds the unrealised part of actions already taken. In the illustrative case LTM is 40.0, run-rate on actioned items 44.17, and the seller's figure with a planned action added 45.67, an uplift of 14.2 per cent.
It varies by evidence, not by convention. Savings visible in payroll may be credited at 90 per cent, a signed procurement contract at 75, a price increase with churn risk at 50, a planned action at nothing. Weighted that way, the illustrative buyer accepts 52.0 per cent of the 5.67 of adjustments.
If the actions deliver, yes. Ten more months, to 31 October, would put the three actioned items fully into LTM, 44.17 instead of 40.0, worth 13.4 more enterprise value than the buyer's 42.95 view at 11.0 times, before the cost of holding longer and the risk that the initiatives slip.
This article is one calculation from The Private Equity Operating Partner. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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