The CNDCEC Guidelines for the Calculation of EBITDA and NFP for Valuation and Transaction Purposes - Part 1


​​​​​​​​​​​published on 11 April 2024 | reading time approx. 4 minutes


​EBITDA and Net Financial Position are two accounting metrics that are frequently used both in performance valuation and in M&A transactions as they are widely accepted measures of corporate performance and sustainability.​

OOn 15 March, the CNDCEC (Italian National Council of Chartered Accountants) published a research paper examining how EBITDA (“Earnings before Interest, Taxes, Depreciation and Amortization”) and NFP (Net Financial Position) are determined. 

These two accounting metrics are considered to be the main indicators for evaluating company performance, especially in the context of M&A transactions, and they have a crucial role in pricing for negotiation purposes.
In this article, we will focus on the EBITDA as an element underlying the valuation of the company. EBITDA is intended to approximate cash generated in a given period. It takes the form of the measurement of an operating cash flow resulting from the economic performance of the period.

This measure is also often used in relation to other economic metrics. We may think of the ratio between EBITDA and revenues, which is the so-called EBITDA margin, or the NFP/EBITDA ratio, which is an important index of financial sustainability.

The EBITDA, with reference to financial statements drawn up in accordance with Italian GAAP (“OIC”) and the Italian Civil Code, is generally calculated as the difference between the value of production (item “A” in the P&L statement) and the cost of production (item “B” in the P&L statement), excluding depreciation, amortization and impairment losses (items B-10-a and B-10-b and B-10-c).

In the approach presented here, only fixed asset write-downs are excluded from the calculation of EBITDA, since a fixed asset write-down consists of an asset impairment loss which is of an exclusively economic rather than financial nature. On the other hand, the write-downs of receivables (B-10-d), provisions for risks (B-12) and other provisions (B-13) are included in the calculation since they effectively represent a loss of income which is also of a financial nature.

With regard to the inclusion or exclusion of certain items in a valuation of economic performance, the elements that make up EBITDA are mainly of a presumed financial nature. However, this principle may not apply to certain items such as increases in fixed assets for internal work, other revenues, write-downs of receivables included in current assets and cash and provisions for risks.

Generally, these items are included in the measurement of EBITDA, but it is advisable to adopt a case-by-case approach in assessing the most appropriate treatment in practice.

For transaction purposes, the use of EBITDA pursues potentially different objectives from those outlined above and is intended to capture the operating cash flow of a company. This may involve making certain adjustments to normalize EBITDA (obtained through the above method) by making the following adjustments:
  1. + financial lease costs (included in item B8 of P&L statement);
  2. -/+ adjustments for transactions with related parties not carried out at fair value; and
  3. -/+ any unusual and non-recurring income or costs such as capital losses or gains made in the disposal of business units, costs or income arising from revaluations/write-downs, insurance indemnities, government grants obtained as a result of temporary regulations.

In the process of normalizing EBITDA, certain peculiarities that characterize family businesses must be considered, such as:
  • discretionary costs not strictly linked to typical company operations, such as entertainment expenses, sponsorship expenses, management benefits and other ancillary expenses without an economic reason (e.g. donations);
  • expenses/revenues of the company that are not attributable thereto but to the entrepreneur and their family;
  • remuneration and bonuses of the entrepreneur and family members that differ significantly from market values;
  • salaries to family members who are not strategic to the business;
  • related company/family transactions.

For negotiation purposes, there are additional EBITDA adjustments that are normally proposed during the Financial Due Diligence phase, such as adjustments for accounting approaches which are deemed not to be in line with the reference principles or with best practice, as well as adjustments that identify the lack of structural costs deemed to be in line with best practice.

In the case of extraordinary transactions involving corporate restructuring or changes in the business such as to alter the future corporate structure, it may be necessary to carry out further normalizations of EBITDA with a forward-looking approach in order to consider, for example, changes in management, termination of leases or relocation of offices, etc.

Lastly, for IAS/IFRS adopters some additional aspects should be considered:
  • flexibility of reporting formats: to date, international accounting standards do not provide for mandatory reporting formats. Therefore, when calculating EBITDA, some adjustments and corrections may need to be defined on a case-by-case basis so that this metric actually reflects the company's potential capacity to generate cash;
  • in spite of the ongoing harmonization between OIC and IAS/IFRS, there continue to be accounting differences in the treatment of certain items (e.g. the different accounting treatment of lease contracts), which require particular attention in the determination of EBITDA.



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Paolo Zani


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