What run-rate EBITDA means, why buyers want a forward number, the legitimate annualising adjustments, and the line that separates run-rate from aggressive add-backs.
A buyer never really wants to buy the past. They pay a multiple, but they pay it for the future — for the earnings the business will generate under their ownership, starting the day after completion. The problem is that the only hard evidence available at the point of pricing is history: twelve or twenty-four months of actuals that describe a business that no longer quite exists. Prices have risen since. A bolt-on was acquired halfway through the year. A restructuring stripped out a layer of cost that will never come back. Run-rate EBITDA is the bridge between those two worlds — the analyst's disciplined attempt to answer the only question the buyer truly cares about: what is this business earning right now, on a forward-looking, annualised basis? Done well, it is one of the most valuable numbers in the whole diligence exercise. Done carelessly, it becomes the most dangerous.
Run-rate EBITDA (sometimes "annualised" or "current-run-rate" EBITDA) takes the most recent, most representative trading and projects it forward to a full-year equivalent as if current conditions had applied for the entire period. It is not a forecast in the budgeting sense — it makes no heroic assumptions about future growth. It simply asks: if the business kept running exactly as it is running today, with the customers, prices, contracts and cost base it has right now, what would a full year of EBITDA look like?
That distinction matters. A forecast leans on things that haven't happened yet: new customers not yet won, markets not yet entered. A run-rate figure leans only on things that are already true but not yet fully reflected in the twelve-month historical numbers. It closes the gap between a backward-looking last-twelve-months (LTM) EBITDA and the earnings the buyer will actually inherit.
Takeaway: run-rate EBITDA is the forward reality of decisions already taken — not a prediction of decisions still to come. Everything hangs on holding that line.
Businesses are dynamic. A set of audited accounts covering the year to December is, by the following summer, describing a business that has changed in half a dozen material ways. If a company put through a 6% price rise in March, the historical accounts contain only nine months of the old price and three of the new. Value the business on that blended history and you undercount the earnings the buyer is actually acquiring.
This is why the quality-of-earnings analysis — the heart of any quality of earnings exercise — increasingly delivers not just a clean historical EBITDA but a run-rate view alongside it. The buyer's model applies its entry multiple to a number that reflects the business as it stands, not as it stood on average across a year that is now history. For anyone still building the foundations, the QoE 101 primer sets out why the "quality" of an earnings figure matters as much as its size.
The commercial logic is simple: you are paying tomorrow's multiple, so you should be paying it on tomorrow's earnings base — to the extent that base is already contractually or operationally locked in.
It is worth being precise about who benefits from the run-rate view, because it is not always the seller. On the sell-side, run-rate is usually a tool of persuasion: the vendor and their advisers build the largest defensible forward number to justify a higher multiple. But run-rate cuts both ways. If a business lost a major contract late in the period, annualising the loss produces a run-rate EBITDA below the LTM figure — and a buyer's FDD team will insist on exactly that adjustment. A genuinely balanced run-rate contains its downside movements as well as its upside ones. The seller who presents only the favourable annualisations, and quietly ignores the contract that lapsed in month eleven, has produced a marketing document, not a diligence output.
There is a defined family of adjustments that a well-run FDD team will consider. What unites them is that each reflects something already committed and evidenced, not something merely hoped for.
Full-year effect of acquisitions. If the target bought a bolt-on in July, the LTM numbers contain only part of a year of that acquisition's earnings. Annualising to a full twelve months of ownership is a legitimate run-rate adjustment — provided the acquired earnings are themselves clean and the integration costs are properly reflected.
Price rises. A price increase implemented partway through the period should be annualised to show a full year at the new price — but only for volume that will genuinely carry the new price, net of any churn the increase provokes. Assuming a price rise sticks with zero customer loss is where legitimate run-rate starts sliding into fantasy.
Cost actions already taken. A restructuring that removed a genuine layer of cost before the reference date — redundancies served, a lease exited, a contract terminated — can be annualised so the full-year saving is reflected. The evidence bar is high: signed agreements, served notices, actual reductions, not a management plan to save cost "in due course".
New contracts already won. A customer contract signed and commenced late in the period can be annualised to a full year of revenue and associated cost, where the contract is executed and delivery has begun. A contract merely in the pipeline is a forecast, not a run-rate item.
These sit within the broader discipline of the EBITDA adjustments overview, and the same evidential rigour applies. The organising question for every one of them is the same: has this already happened, and can I prove it?
Take a services business with a clean LTM EBITDA of €5.0m. The FDD team layers on four run-rate adjustments, each supported by evidence in the data room.
| Item | Basis | Adjustment (€) | Running EBITDA (€) |
|---|---|---|---|
| LTM EBITDA (clean) | Historical actual | — | 5,000,000 |
| Full-year effect of July bolt-on | Annualise 6 months of ownership | +600,000 | 5,600,000 |
| March price rise (net of 1% churn) | Annualise remaining 9 months at new price | +350,000 | 5,950,000 |
| Restructuring saving (redundancies served in Q4) | Annualise a full year of the saving | +400,000 | 6,350,000 |
| Major contract commenced November | Annualise to 12 months of trading | +250,000 | 6,600,000 |
| Run-rate EBITDA | 6,600,000 |
The business earns €5.0m looking backwards, but €6.6m on a run-rate basis — a 32% uplift, every euro of which reflects something already done, signed or served. At an 8x multiple, that gap is worth €12.8m of enterprise value. Which is precisely why the seller wants the run-rate number to be as large as possible, and precisely why the buyer's FDD team scrutinises each layer to breaking point.
A 32% uplift from LTM to run-rate is a headline that demands evidence to match. On the sell-side it is the pitch; on the buy-side it is the interrogation. The number is only as good as the paper trail behind each adjustment.
Here is where the discipline lives, and where interviewers love to probe. The whole legitimacy of a run-rate adjustment rests on one test: is it already committed, or is it merely hoped for?
| Legitimate run-rate | Aggressive add-back |
|---|---|
| Redundancies served; notice given | Redundancies planned; "we intend to reduce headcount" |
| Contract signed and commenced | Contract in the pipeline / "highly likely" |
| Price rise implemented, net of churn | Price rise proposed, assuming zero churn |
| Acquisition completed, earnings annualised | Synergies the buyer might one day extract |
The rule of thumb is that a run-rate adjustment must reflect an event that has already occurred and whose financial effect is simply not yet fully reflected in twelve months of actuals. The moment the justification shifts to something that will happen, could happen, or should happen, you have crossed from run-rate into forecast — and forecasts do not belong in a normalised earnings figure the buyer is pricing off.
Two abuses are especially common. The first is claiming buyer synergies as run-rate: cost savings only the acquirer can deliver do not belong in the target's standalone earnings, and pricing them into EBITDA hands the buyer's own value creation back to the seller. The second is annualising price rises with no churn assumption, pretending customers will absorb a 6% increase without a single one walking away. Both inflate the number, and both are exactly the sort of thing that lands in the red flags of FDD when a diligence team catches them.
Run-rate EBITDA is not a standalone party trick — it plugs into the same architecture as every other earnings adjustment. The team builds up from statutory or management EBITDA, applies the normalising adjustments, and then presents both the clean historical (LTM) EBITDA and the run-rate EBITDA so the buyer can see the walk from one to the other. That build-up is the earnings bridge that a robust FDD report structure is organised around.
The commercial consequence is direct. The multiple is applied to a chosen EBITDA base to derive enterprise value, and the choice of base is itself a negotiation. Sellers push for the highest defensible run-rate; buyers anchor to the clean historical figure and concede run-rate uplift only where the evidence is unarguable. From there the deal moves through the enterprise-to-equity bridge to a share price. So a single, well-argued run-rate adjustment — or a single one successfully knocked out — can move the headline price by a multiple of its own value. That leverage is why this analysis is worth doing properly.
Run-rate is fertile interview territory because it tests whether you understand the purpose of an earnings adjustment, not just the mechanics. A frequent prompt: "A management team tells you EBITDA should be higher because they've announced a restructuring that will save €400k a year. Would you put that in run-rate EBITDA?"
A strong answer refuses the bait and reaches for the evidence test:
"It depends entirely on how far the restructuring has actually gone. If the redundancies have been served — notice given, the roles genuinely gone by the reference date — then annualising a full year of the saving is a legitimate run-rate adjustment, because it reflects something that has already happened and simply isn't fully in the twelve-month numbers yet. But if it's only been announced, or it's a plan management intends to execute after completion, then it's a forecast, not run-rate, and I'd exclude it. I'd want to see the signed agreements and served notices, and I'd sense-check the saving net of any one-off costs to achieve it and any revenue impact. My guiding question is always the same: has this event already occurred, and can I prove it? If the answer is 'it will happen', it doesn't belong in the number the buyer is pricing off."
That answer works because it shows you know the line, and that the line is drawn by evidence rather than by optimism.
Run-rate EBITDA is where financial due diligence stops describing the past and starts pricing the present. Get it right and you hand the buyer the truest available picture of what they are about to own — the business as it actually runs today, annualised with a straight face. Get it wrong, or let it drift into a wish-list of savings not yet made and contracts not yet won, and you have simply dressed a forecast in the clothes of an actual. The whole craft comes down to one unglamorous discipline: for every euro of uplift, be able to point to the moment it already happened. Hold that line, and run-rate becomes the buyer's best friend. Lose it, and it becomes the seller's favourite illusion.
The Transaction Services Interview Programme (€119.99, one-time) includes a full run-rate module: building the walk from LTM to run-rate EBITDA, stress-testing acquisition, price-rise and restructuring adjustments against the evidence bar, and defending — or dismantling — a run-rate case in a live interview setting. Enrol today.
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