Credit Agreement Buckets that enable a borrower to have flexibility during the post close period are a critical element of your negotiated financing agreement. We’ll cover all the ways that EBITDA can be defined (or at least the main “flavors”) in another post…for now, let’s talk about “add-back buckets”. These buckets or baskets are created with credit agreements so certain known or expected “one time” costs can be added back to EBITDA so the borrow is not penalized for the associated costs or expenses in their EBITDA.

Credit Agreement Buckets Example 1: Carve-out Costs (1x cost)

These could include costs to implement a new ERP system, hire an executive team, terminate a lease or the costs associated with signing a new one, or any number of costs that are related with the establishment of a new entity. Going into negotiate a credit agreement without scheduling out the amount of these costs and their expected timing does no one (especially you) any favors. Give yourself enough time (longer than you think you’ll need) to spend the money, and be as vague as possible with respect to how you’ll spend it. Loose language is your friend in these cases.

Credit Agreement Buckets Example 2: Restructuring Costs

You may be going into a situation where you know there are 1x costs associated with a transaction related to restructuring. In these events, you should be able to calculate the labor and non-labor costs associated with the restructuring and work these into your list of items that build up your credit agreement bucket.

Credit Agreement Buckets Example 3: Strategic Consulting

If you’re going to pay McKinsey, Bain, A&M or Alix Partners to do work on your behalf, by golly get an add-back for it! The premise for hiring any of these firms should be that a dollar spent gets you more than a dollar of EBITDA! Their great advice doesn’t typically come cheap though, so work with your lender to get an add-back for these costs. On of the most commonly used credit agreement buckets relates to the use of consultants.

Credit Agreement Buckets Example 4: One-time impacts

If you’re business has been impacted by say…a 1 in 100 year pandemic event, you can likely capture the dollar value / impact of the event and work with your lenders to arrange some form of credit that makes your LTM EBITDA whole, as long as the event did not cause so much harm to the business that your lender’s economic position is going to suffer (in which case they may want compensation in some form or another, but that’s for you and lawyers to work out with them!)

Credit Agreement Buckets Example 5: Transaction related costs

This doesn’t just apply to the initial deal. You may be able to negotiate credit agreement buckets for acquisition expenses associated with a tuck-in strategy that you are executing. Going back to the lenders for these may be reasonable or onerous and time consuming – no two cases are going to be the same and you should carefully evaluate your options while you are negotiating with lenders to get maximum favorability!

Summary:

Use the knowledge you’ve accumulated during your Due Diligence period plus the general learnings you’ve accumulated through ownership or evaluation of similar businesses to the one you investing in to maximize the buckets or baskets that your lender will allow. As long as the items in those baskets are included in good faith and ultimately add to the value of the long term enterprise your lenders should be a willing partner.