EBITDA Multiples In M&A Agreements And Post-Closing Disputes

Overview and Key Practical Takeaways

It is common for M&A buyers, and particularly private equity buyers, to price a deal based on a multiple of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)—among other things. How, then, should damages be calculated if the seller is found to have breached representations that informed the buyer's financial assessments?

A recent Delaware ruling awarded damages to a buyer based on the EBITDA multiple the buyer used to set the purchase price, and is instructive for dealmakers both north and south of the border. Our key practical takeaways include:

• Representation and warranty insurance (RWI) data indicates that the frequency of post-closing M&A claims in North America seeking damages on a multiple basis (as opposed to a dollar for dollar basis) is trending steadily upwards.