Industries have certain special characteristics that oftentimes dictate what is non-recurring or recurring because of unique features of that particular industry. For example:
- Pharmaceutical firms typically incur substantial recurring R&D expenses. Those type of expenditures would be recurring, normal course rather than one time or infrequent in that particular industry. In fact, a Company’s deferral of such recurring costs might warrant a normalizing, pro forma adjustment to include those costs, thereby lowering EBITDA and the related valuation.
- Another example in a different industry, many technology firms are typically subject to recurring inventory obsolescence and related write-downs. Our firm has seen instances in which a company has understated Excess & Obsolete inventory costs or added them back as one-time, nonrecurring.
Adding back those type of recurring expenses to increase EBITDA inappropriately increases the related valuation. I cannot emphasize enough the importance of understanding the industry and the specific business. A good understanding of both the company and its specific industry are critical to distinguishing legitimate adjustments from aggressive or inappropriate ones.
