SaaS Businesses: Addback R&D to Adjusted EBITDA?

by a searcher

3 years ago

In evaluating a software business, is it okay to add back research and development costs to calculate adjusted EBITDA? The thought process is that R&D will provide future revenue in the form of new features, and functionality. for the software to stay competitive...so to calculate current year free-cash-flow, R&D should be added back to earnings. Interested in commentary from folks who have financed a SaaS business.

3 likes
142 views
9 comments

investor from Clarion University of Pennsylvania - College of Business Administration and Information Sciences

Totally in agreement with both comments.

3 years ago | like reply | 0 likes

intermediary from The University of Chicago - Booth School of Business

EBITDA is a starting point in valuation, not an end. From EBITDA, you have to deduct all cash outlays. So, let us say you add R&D to EBITDA b/c it was capitalized. Now, for future cash flow, you should deduct future R&D. I R&D is not required going forward, or not at the same level, addition of R&D to EBITDA truly increases EBITDA. This is not different than CapX. Again, focus on future cash flow after you start with EBITDA.. I know SFs are highly educated, but I often find that many of them are brain-washed with valuation is just a simple multiple of EBITDA.

3 years ago | like reply | 2 likes

More on Searchfunder

Just Closed on My First Deal! Reflections and Takeaways for other Searchers

45,152 transactions are available on Searchfunder (now searchable by keyword)

Now everyone has unlimited IBISWorld access

Family office looking for traditional searchers

Examples of self-funded searcher websites

Investor seeking Self-Funded Search Deals

What are market terms for Seller Notes?

2 Best Ways To Find Motivated Sellers, Off-Market Deals

Searchfunder is an online community and toolkit for searchfunds. Over 80% of those involved in searchfunds maintain a Searchfunder.com account to help them network, problem solve challenges, and keep up with the industry.

We maintain partnerships with database providers that make searching more effective, efficient and affordable along with features that help searchers find deals and investors and vice versa.