hard · Investment Banking valuation-core

Why do analysts usually add back Stock-Based Compensation (SBC) when calculating EBITDA for a 'Cash Flow' LBO model, but often do not add it back when calculating 'Trading Multiples' for peer comparison?

1. In an LBO, the incumbent management team is usually replaced or re-incentivized, so SBC is generally assumed to drop to zero immediately after closing.
2. LBO models focus on the actual cash available for debt service, whereas trading multiples require consistency in treating SBC as an operating expense across peers.
3. SBC is tax-deductible for a newly private LBO target but not typically for a public company, creating a permanent difference in reported EBITDA calculations.
4. Public markets require analysts to add back SBC in order to comply with GAAP reporting standards, while LBO models instead use 'Adjusted' figures purely for internal simplicity.

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