medium · Private Equity value-creation

During financial due diligence, a 'Quality of Earnings' analyst identifies that the target company's rent is paid to a property company owned by the founder at 50% of market rates.

How should this be adjusted in the EBITDA bridge?

  1. Make no adjustment, but include the property as an 'Excess Asset' in the Enterprise Value bridge.
  2. Add back the total rent paid as a non-recurring expense.
  3. Decrease Adjusted EBITDA by the amount needed to bring the rent to arm's-length market rates.
  4. Increase Adjusted EBITDA because the low rent is a cost saving for the business.

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