SaaS Businesses: Addback R&D to Adjusted EBITDA?

by a searcher

4 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
147 views
9 comments

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

Totally in agreement with both comments.

4 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.

4 years ago | like reply | 2 likes

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