# What Are the Most Common Points of Negotiation for EBITDA Adjustments in a Credit Agreement? ▴ Question

**Published:** 2025-08-23
**Categories:** Question

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## Concept

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## EBITDA as a Negotiated Reality

In the architecture of a [credit agreement](https://prime.greeks.live/area/credit-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), the definition of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) serves as the master blueprint. It is the foundational language upon which covenants are built, leverage is measured, and the financial health of the borrower is communicated. The negotiation of this single metric is a critical process where a company’s operational narrative is translated into the precise, binding language of a contract.

The adjustments applied to a company’s reported net income to arrive at this contractual EBITDA are not mere accounting formalities; they represent a series of strategic decisions that shape the flexibility and constraints of the borrower for the life of the loan. Understanding these points of negotiation is essential for both lenders, who must protect their capital, and borrowers, who require the operational latitude to execute their business strategy.

The core purpose of these adjustments is to normalize earnings, creating a proxy for recurring operational cash flow that both parties can agree upon. This involves stripping out items that are non-cash, non-recurring, or otherwise unrepresentative of the company’s core, ongoing profitability. The process is a delicate balance. Borrowers advocate for more expansive adjustments to present a stronger financial picture, thereby increasing borrowing capacity and creating more headroom under [financial covenants](https://prime.greeks.live/area/financial-covenants/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

Lenders, conversely, push for a more conservative and restrictive definition to ensure the metric accurately reflects the cash flow available to service debt. The resulting negotiated definition of EBITDA becomes a unique, deal-specific construct, reflecting the specific circumstances of the business, the dynamics of the market, and the negotiating leverage of each party.

> The negotiation of EBITDA adjustments transforms a standard accounting metric into a bespoke contractual measure of operational performance.

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## The Purpose of Normalization

Normalization aims to create a stable and predictable measure of performance. Business operations are rarely linear; they are affected by one-time events, strategic initiatives, and market fluctuations. A credit agreement, however, requires a consistent basis for evaluation. Adjustments for extraordinary or non-recurring items, such as gains or losses from asset sales, litigation settlements, or restructuring charges, are designed to smooth out these peaks and valleys.

This allows both the borrower and the lender to assess performance based on the underlying strength of the core business, rather than being misled by events that are unlikely to repeat. The negotiation, therefore, centers on what truly constitutes a “non-recurring” event. A borrower might argue that a specific restructuring is a one-time strategic pivot, while a lender might scrutinize whether such “one-time” costs appear with regularity, suggesting they are a recurring feature of the business model.

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## Strategy

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## Frameworks for Borrower and Lender Objectives

The negotiation of EBITDA adjustments is a strategic exercise where the objectives of the borrower and lender are in direct opposition, yet must ultimately align to close a transaction. The borrower’s primary goal is to maximize financial flexibility. This is achieved by negotiating for a broader definition of EBITDA, which in turn lowers calculated leverage ratios. A lower [leverage ratio](https://prime.greeks.live/area/leverage-ratio/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) can unlock more favorable pricing, permit larger dividends or acquisitions, and provide greater cushion against covenant breaches during periods of underperformance.

The lender’s strategy is centered on risk mitigation. They seek a conservative definition of EBITDA that closely tracks actual cash-generating capacity, ensuring that financial covenants are a meaningful early warning system for credit deterioration.

This strategic tension manifests across several key categories of adjustments. Each category represents a distinct battleground where definitions, caps, and conditions are debated. Success in these negotiations depends on the substantiation of claims, the prevailing market conditions, and the perceived strength and credibility of the borrower’s management team and its financial sponsors.

> Negotiating EBITDA is a strategic exercise in defining financial reality to balance the borrower’s need for flexibility with the lender’s need for security.

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## Key Arenas of Negotiation

The specific points of negotiation for EBITDA adjustments are numerous and vary by deal, but they can be grouped into several primary categories. Each of these represents a common area where borrowers and lenders expend significant effort to shape the credit agreement in their favor.

- 
**Non-Cash and Accounting-Driven Adjustments** ▴ These are often the least contentious add-backs. They include items like stock-based compensation, deferred rent, and other non-cash charges that reduce net income without a corresponding cash outflow. While the principle is widely accepted, negotiations can arise over the specifics, particularly ensuring that any cash portion of these expenses is not added back.

- 
**Extraordinary, Unusual, or Non-Recurring Items** ▴ This is a highly negotiated area. Borrowers will seek to add back costs related to events deemed to be outside the normal course of business, such as restructuring costs, facility closures, severance, and litigation settlements. Lenders will scrutinize these items to ensure they are genuinely one-time events and may seek to cap the total amount of such add-backs.

- 
**Transaction and Financing-Related Costs** ▴ Fees and expenses related to the financing itself, as well as acquisition or integration costs, are commonly added back. The rationale is that these are not part of the company’s ongoing operational cost structure. The negotiation often focuses on the scope and duration of these add-backs, especially for integration costs that may be incurred over an extended period.

- 
**Pro Forma and Run-Rate Adjustments** ▴ This category is arguably the most forward-looking and, therefore, the most contentious. It involves adjusting historical EBITDA to reflect the anticipated future impact of specific actions. The most common examples are [cost savings](https://prime.greeks.live/area/cost-savings/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and synergies expected from an acquisition or a restructuring initiative.

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## Comparative Analysis of Common Adjustment Categories

The strategic approach to each adjustment category differs based on its nature and the degree of certainty involved. The table below outlines the primary objectives and common negotiation points for each.

| Adjustment Category | Borrower’s Primary Objective | Lender’s Primary Concern | Common Negotiation Points |
| --- | --- | --- | --- |
| Non-Cash Items | Ensure all non-cash charges are added back to reflect cash earnings. | Preventing the add-back of any associated cash expenses. | Defining the scope of non-cash items; treatment of stock options exercised. |
| Non-Recurring Items | Maximize the scope of what is considered “non-recurring” to clean up historical earnings. | Ensuring items are truly one-time and not part of ordinary course business. | Caps on amounts; time limits for incurring costs; definition of “non-recurring.” |
| Transaction Costs | Add back all fees and expenses related to acquisitions and financing. | Limiting the duration and scope of integration-related add-backs. | Timeframe for add-backs (e.g. 12-18 months post-acquisition); scope of eligible costs. |
| Cost Savings & Synergies | Maximize the amount of projected, unrealized savings that can be added to EBITDA. | High degree of uncertainty; risk that savings will not materialize. | Caps on amounts (fixed dollar or % of EBITDA); requirement for detailed action plans; time limits to achieve savings. |

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## Execution

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## The Mechanics of Substantiation and Agreement

The execution phase of negotiating EBITDA adjustments moves from strategic positioning to the granular work of defining, documenting, and defending each proposed add-back. The central tool in this process is often the [Quality of Earnings](https://prime.greeks.live/area/quality-of-earnings/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (QoE) report, a detailed analysis of a company’s historical earnings prepared by an independent accounting firm. A QoE report provides a third-party validation of proposed adjustments, lending them credibility and forming the basis for negotiation.

For the borrower, a well-prepared QoE report is a critical offensive tool. For the lender, it is a foundational piece of due diligence that allows them to get comfortable with the adjustments that will ultimately define their credit risk.

The negotiation itself often proceeds on an item-by-item basis. Lenders’ counsel will carefully scrutinize the language in the proposed credit agreement, as imprecise definitions can create unintended loopholes. For instance, defining “cost savings” is a critical exercise.

Lenders will push for language requiring that such savings be “realizable,” “identifiable,” and supported by a detailed plan. Borrowers will seek more flexible terms, allowing for adjustments based on actions that are “expected” or “projected.”

> The precision of the language defining each EBITDA adjustment in the final credit agreement is the ultimate determinant of its value and risk.

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## Executing the Negotiation of Pro Forma Adjustments

Pro forma adjustments, particularly for cost savings and synergies, represent the pinnacle of negotiation complexity because they involve adding back expenses that have not yet been eliminated. The execution of this negotiation requires a clear, systematic approach from the borrower to overcome the lender’s inherent skepticism.

- 
**Identification and Quantification** ▴ The borrower, often with the help of advisors, must first identify specific, actionable initiatives that will generate cost savings. These cannot be vague aspirations; they must be detailed plans, such as headcount reductions, facility consolidations, or procurement savings from increased purchasing power. Each initiative must be quantified with a specific dollar amount.

- 
**Creation of a Support Package** ▴ A detailed memorandum should be prepared for the lenders, outlining each proposed synergy or cost-saving initiative. This document should include the rationale, the specific actions to be taken, the timeline for implementation, and the evidence supporting the financial impact.

- 
**Negotiating Caps and Constraints** ▴ Lenders will almost always insist on limitations for these forward-looking adjustments. A common point of negotiation is the cap, which can be a fixed dollar amount or a percentage of EBITDA (typically ranging from 15% to 25%). A crucial detail is whether this percentage is calculated based on EBITDA before or after the add-backs; calculating it after gives the borrower a larger capacity for adjustments.

- 
**Defining the Time Horizon** ▴ Another key negotiation point is the period over which the savings must be realized. Lenders will typically require that the actions generating the savings be taken within a specific timeframe (e.g. 12 to 24 months from the closing date) for the add-back to be permitted.

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## Common Sticking Points in Add-Back Negotiations

The table below details specific, commonly debated adjustments and the typical points of friction that arise during the execution of the negotiation.

| Specific Add-Back | Borrower’s Position | Lender’s Counter-Position | Typical Compromise |
| --- | --- | --- | --- |
| Management & Sponsor Fees | These are payments to the private equity sponsor and should be added back as they are not core operational expenses. | These are real cash outflows that reduce cash available for debt service. | Fees are often permitted as an add-back, but sometimes only if they are subordinated to the lender’s debt. |
| Severance Costs | Part of a one-time restructuring and should be fully added back. | Is the company constantly restructuring? If severance is a regular occurrence, it may be an ordinary course expense. | Capping the amount of restructuring-related add-backs per year or over the life of the loan. |
| Unrealized FX Gains/Losses | These are non-cash accounting entries and should be adjusted to reflect the true cash position. | Agreed, but the definition must be precise to capture only unrealized, non-cash movements. | Precise language in the credit agreement to neutralize the impact of all non-cash hedging and FX adjustments. |
| COVID-19 or Other “Event” Adjustments | Argue for adding back lost revenue or adding back specific costs incurred due to an unprecedented event. | Highly speculative, difficult to prove, and may mask underlying business weakness. | Generally, lenders are very resistant to lost revenue add-backs but may permit the add-back of specific, documented costs. |

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## References

- Hall, Aaron. “EBITDA Adjustment Clauses in Credit Facility Terms.” Attorney Aaron Hall, 2023.

- Haynes and Boone, LLP. “EBITDA Adjustments in Loan Negotiations.” Practical Law, 2024.

- Haynes and Boone, LLP. “EBITDA ▴ Loan Agreement Negotiating Considerations.” Practical Law, 2024.

- Frost Brown Todd LLC. “Credit Financing ▴ Adjusted EBITDA Cheat Sheet.” Frost Brown Todd, 9 Mar. 2020.

- “EBITDA ▴ Loan Agreement Negotiating Considerations.” Thomson Reuters Westlaw, 2024.

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## Reflection

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## EBITDA as a Dynamic Operating System

Viewing the negotiated EBITDA definition merely as a static component of a credit agreement is a fundamental miscalculation. It is more accurately understood as the central processing unit of the agreement’s operating system. This definition dictates the flow of information, governs the execution of permissions (such as the ability to make acquisitions or issue dividends), and triggers system alerts (covenant breaches). The negotiation process is the initial programming of this system.

Every add-back, every cap, and every precisely worded clause is a line of code that will determine the borrower’s operational freedom and the lender’s security parameters for years to come. Therefore, the strategic objective should extend beyond simply securing the most favorable terms at closing. It should involve designing a system that is robust, transparent, and aligned with the long-term operational trajectory of the business, ensuring that the language of the contract accurately reflects the economic engine it is intended to measure.

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## Glossary

<a href="https://prime.greeks.live/area/credit-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Credit Agreement

Meaning ▴ A Credit Agreement constitutes a formal, legally binding contract between a lender, typically a Prime Broker, and a borrower, an institutional Principal, delineating the terms and conditions under which credit is extended for trading activities. </a><a href="https://prime.greeks.live/area/financial-covenants/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Financial Covenants

Meaning ▴ Financial Covenants represent contractual stipulations imposed by lenders upon borrowers, designed to safeguard the lender's interests by mandating specific financial performance metrics or operational constraints throughout the term of a credit facility. </a><a href="https://prime.greeks.live/area/leverage-ratio/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Leverage Ratio

Meaning ▴ The Leverage Ratio quantifies a firm's financial leverage, representing the proportion of its assets financed by debt relative to its equity capital. </a><a href="https://prime.greeks.live/area/cost-savings/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Cost Savings

Meaning ▴ Cost Savings represents the quantifiable reduction in both explicit and implicit expenses associated with institutional trading and operational processes within the digital asset derivatives ecosystem. </a><a href="https://prime.greeks.live/area/quality-of-earnings/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Quality of Earnings

Meaning ▴ Quality of Earnings refers to the reliability, transparency, and sustainability of a company's reported financial performance, distinguishing between robust, cash-backed profits and those derived from non-recurring events, aggressive accounting policies, or accrual-based adjustments. </a>

**Tags:** [Financial Covenants](https://options.greeks.live/area/financial-covenants/), [Cost Savings](https://options.greeks.live/area/cost-savings/), [Pro-Forma Synergies](https://options.greeks.live/area/pro-forma-synergies/), [Quality of Earnings](https://options.greeks.live/area/quality-of-earnings/), [Add-Backs](https://options.greeks.live/area/add-backs/), [EBITDA Adjustments](https://options.greeks.live/area/ebitda-adjustments/)	

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- 
### [What Are the Key Performance Indicators for Measuring RFP Process Efficiency and Its Effect on Profit?](https://options.greeks.live/question/what-are-the-key-performance-indicators-for-measuring-rfp-process-efficiency-and-its-effect-on-profit/)
![A sleek, multi-component device with a dark blue base and beige bands culminates in a sophisticated top mechanism. This precision instrument symbolizes a Crypto Derivatives OS facilitating RFQ protocol for block trade execution, ensuring high-fidelity execution and atomic settlement for institutional-grade digital asset derivatives across diverse liquidity pools.](https://options.greeks.live/wp-content/uploads/2025/08/advanced-mechanism-for-principal-trading-firm-rfq-protocols-and-high-fidelity-digital-asset-derivatives-execution.jpg)

Measuring RFP efficiency translates process velocity, quality, and financial impact into a quantifiable effect on profitability.

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---

**Original URL:** https://options.greeks.live/question/what-are-the-most-common-points-of-negotiation-for-ebitda-adjustments-in-a-credit-agreement/
