If a PE portfolio company does a sale leaseback, how does this affect EBITDA?

Overall, EBITDA is lower, although the company receives cash proceeds from the sale of the property.

A sale-leaseback increases rent expense, typically found in SG&A, so we would adjust the first half of the income statement as if they were renting the properties already.

By selling the asset, we are also reducing our depreciation and amortization expense. We reduce D&A as if we sold the properties at the beginning of the year. However, D&A is below EBITDA.

If we are forecasting this for financial modeling purposes, we usually assume the company does the sale-leaseback in the middle of the year. If so, we must adjust the first half of last year pro forma for the sale-leaseback. In other words, we will adjust the financial statements as if they did the sale-leaseback at the beginning of the year. This is done to make the financials comparable and on the same basis as the future projected years, so that we can calculate metrics like pro forma revenue growth and EV / EBITDA without skewing the numbers due to the timing of the sale-leaseback.