The Math: Validating the 'Big Three' Software Add-Backs
In software M&A, three categories define the gap between Accounting EBITDA and Economic Reality. Your model must distinguish between a valid one-time event and systemic operational bloat.
1. The Tech Debt Add-Back: Opex vs. CapEx
Sellers love to classify code refactoring as a "one-time product modernization" add-back. Buyers must scrutinize this. If the "modernization" has been ongoing for 18 months, it is not an add-back; it is R&D opex.
- The Benchmark: True "Tech Debt Remediation" add-backs are valid only if they resolve a specific, non-recurring architectural flaw (e.g., migrating off a deprecated legacy database).
- The Warning: Kickdrum notes that hidden technical debt is the primary driver of post-close roadmap stalls. If you accept a seller's add-back for "reduced cloud costs" without verifying the architectural fix, you are buying a margin contraction.
2. Integration Costs: The 2-7% Rule
Synergies are the largest category of add-backs, averaging 28.2% of total adjustments. Yet, they are the most speculative. To model this conservatively, do not just accept the seller's "redundant headcount" line item. You must contra-revenue the cost to achieve it.
- The Formula: Integration costs (severance, system migration, retraining) typically run 2% to 7% of total deal value according to data from EY.
- Action: If your deal model assumes $5M in synergy add-backs but allocates less than $1M (2% of a $50M EV) to integration execution, your EBITDA bridge will collapse post-close.
3. SaaS Specifics: Cash-Adjusted EBITDA
For subscription models, standard EBITDA is insufficient because it ignores the cash impact of deferred revenue. You must calculate Cash-Adjusted EBITDA to see the true liquidity profile.
- The Formula: Trailing 12-Month EBITDA + (Change in Deferred Revenue).
- Context: Software Equity Group advises that this metric often reveals a healthier cash position for growing SaaS firms than GAAP EBITDA suggests, justifying a higher effective multiple if the growth is paid up-front.
The Verdict: Move from 'Adjusted' to 'Realizable'
The era of accepting 50%+ add-back bridges is ending. Lenders are tightening covenants, and the "fake EBITDA" discount is real. To win in 2026, Portfolio Paul must invert the diligence process:
- Cap the Synergies: Limit "expected cost savings" add-backs to realizable actions executable within 6 months post-close.
- Audit the 'One-Time': Demand a vendor-level general ledger export for any "non-recurring" software expense. If AWS bills didn't drop after the "migration," the add-back is denied.
- Focus on Cash-on-Cash: Ultimately, financial engineering cannot fix a broken product. Use Cash-Adjusted EBITDA as your floor, not your ceiling.
Your goal is not just to close the deal—it is to ensure the EBITDA you bought actually shows up in the bank account.
