EBITDAC Around the World

What has been widely done in the market during the pandemic, where companies were greatly impacted and this completely deviated from the normalization of business, is adopting adjustments for the coronavirus period in order to calculate EBITDA. This is how the new indicator, EBITDAC, came into being.

Large companies in countries like Germany, the United States, and Spain have already adopted and published EBITDAC in their explanatory notes. They make the necessary adjustments and explain what the results would have been under normal, non-pandemic circumstances.

In Brazil, the CVM (Brazilian Securities and Exchange Commission) already has Normative Instruction 327, which deals with topics related to EBITDA (or LAJIDA in Portuguese). This normative instruction introduced a standardization for adjustments, outlining what can and cannot be done. This instruction has been in place since 2012.

Defenders and Opponents

EBITDAC has been highly controversial worldwide. Some defend its use, arguing that due to the uncertainty and the significant impact on businesses, it is fair to make the necessary adjustments. This is because a series of extraordinary expenses, unrelated to the company’s usual operations, arose during this period, such as layoffs, contractual fines, renegotiations, and extension of deadlines.

Expenses that wouldn’t make sense in a normal situation, such as the reduction in the number of people on production lines and the impact of working from home, also occurred. All of this affects operational expenses, so these items must be added to the calculation to get a more accurate EBITDA.

On the other hand, there are those who oppose EBITDAC. This position considers that since we don’t know whether the pandemic phase will last one more year or just three more months—it’s very unpredictable—it doesn’t make sense to make adjustments based on this period. It’s possible that after businesses return to normal, they might not go back to the way they were, so there is no logic in working with the concept of EBITDAC.

Since no one can answer these questions with certainty, the argument is that we shouldn’t add the expenses that occurred during the pandemic period for purposes of calculation or credit evaluation.

Banks, Agencies, and Companies

Banks and credit rating agencies have not agreed with the concept of EBITDAC, citing its subjectivity. They argue that they haven’t taken the impacts of coronavirus into account for credit and risk evaluation purposes. On the other hand, companies like Venture Capital and Private Equity have a more mature understanding.

They believe that businesses have indeed been impacted and that we should evaluate whether companies are managing to turn this “lemon” into “lemonade,” by pivoting their businesses and moving them more online. This means working on scalability, developing new products, and rethinking strategies.

Therefore, Venture Capital firms have become more demanding, more risk-averse, but they look at businesses differently and understand their valuations. A Valuation cannot be based solely on current EBITDA but should also account for some items that are possible to adjust and treat as EBITDAC.

Our Recommendations

When the topic is EBITDAC, there are two sides: those who agree and those who disagree. In any case, we believe that this indicator is, and hopefully will remain, only temporary, but it makes sense for those who believe the indicator should be adjusted. Therefore, companies should assess EBITDAC, but measure the adjustments in a documented manner.

What expenses are there? What impacts have they had on your margin? How much did your revenue actually drop because of this period, or how much did it increase? EBITDAC is not just about adjusting expenses, but also adjusting revenue. Will your current revenue continue? If it has grown, measure it more accurately for more security in financial analysis.

Adjusting Company Size

What should I do to avoid having to discuss EBITDA or EBITDAC, or to make both work together more effectively? The first step is to prepare the company for its current size. If I have the fixed structure of a company that was generating double the revenue and now generates 1.5 times that amount, the goal is to transform the company so that it fits its current reality.

Adjusting the size of the company to match reality doesn’t mean just slashing costs, firing people in an uncontrolled way or without analysis. Often, you may lose valuable talent and important investments that will have future benefits.

Thus, effective financial planning is crucial—creating scenarios in different ways, and the controlling department plays an essential role. Invest in your controlling department to emerge stronger from this crisis.

EBITDAC: Short-Term Thinking

This is the Law of Survival. We are in a “war” period, and for many affected companies, the important thing is to survive. Focus more on the short term, assess your cash flow in the immediate future, and plan with a short-term perspective focusing on cash effects.

To do this, review inventory turnover. It’s important to revisit pricing strategies—this is the moment to have turnover. It’s much healthier to focus on inventory turnover than to let goods sit idle. You might have to sacrifice margins, but it generates cash, and right now, generating cash is what matters.

Competitive Advantage

Finally, pay attention to competitive advantage. What can I learn during this pandemic to implement in my company and create a competitive edge in the market?

This major opportunity to reassess and rethink business models is a key path during this time. It’s very possible that after we return to normalcy, a large number of businesses will be impacted in such a way that pre-COVID-19 business models will no longer make sense.

EBITDAC on YouTube

Did you like our article? Also check out the video below on EBITDAC, presented by Moacir Vieira, founding partner of the Value Group. Think about it, study it, engage your team, and work constantly toward efficiency and competitive advantage. We, at Value, thank you for reading and wish everyone success and good EBITDAC!