Is interest on a Line of Credit an add-back
March 29, 2024
by a professional from Western Washington University in Spokane, WA, USA
Interest on long term debt is a generally recognized adjustment. Is interest on a Line of Credit considered an add-back? I've not seen that included before, but just encountered it. This is a small deal so is being valued by SDE.
Thoughts?
from IE Business School in Florida, USA
In summary, interest expense is below EBITDA. Your credit/financing profile is irrelevant to the value of a asset being acquired. The “cost of renting money” to buy a business does not have an effect on the value of the business and that is why it is excluded.
I like to compare it to sale of the house. Example: a seller has average credit and pays 10% interest rate on the mortgage of the house. You are the buyer and have excellent credit. You were offered 5% for the loan to buy the property. Does that affect the value of the property? No, it does not. It may only impact the amount you are able to finance.
Now use the same example but with a seller that has no debt on the property and you have bad credit, and the opposite, the seller has an expensive loan and you are a cash buyer. It does not impact the value of the asset.
The credit/risk profile, read interest, is only relevant to the owner (or potential owner) of the asset… and the lender for whatever it’s worth.
Hope this helps.
from The University of Chicago in Chicago, IL, USA
Value of a firm i(aka Enterprise Value or CFDF value) is independent of its existing capital structure.