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