Answers / Financial Due Diligence
What is the difference between an LTM adjustment and a run-rate adjustment in QoE, and why is run-rate the more dangerous one to accept?
An advanced Financial Due Diligence question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
An LTM adjustment restates the last twelve months for things that actually happened — removing a one-off cost or annualizing a contract that was live for part of the period. A run-rate adjustment projects forward, reflecting the full-year effect of a change as if it had been in place all year — e.g., a price increase taken in month 10, or headcount cuts not yet fully realized. Run-rate is more dangerous because it credits EBITDA for benefits that haven't been earned and may never fully materialize: it relies on management's assumption that the change sticks, with no historical proof. So I scrutinize the evidence — is the price actually invoiced, are the cuts executed and irreversible — and I'd quantify and ring-fence run-rate add-backs separately so the buyer sees how much of 'adjusted EBITDA' is real history versus forward promise.
WHAT INTERVIEWERS LISTEN FOR
- ✓LTM = restate actual history; run-rate = annualize forward effect
- ✓Run-rate credits unearned, unproven benefits
- ✓Demand evidence the change is executed/irreversible
- ✓Ring-fence run-rate add-backs separately
COMMON MISTAKES
- ✗Accepting run-rate add-backs without execution evidence
- ✗Mixing run-rate and historical in one EBITDA figure
- ✗Not distinguishing the two
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