EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization — the most widely used measure of business profitability when valuing a company for sale.
What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It strips out financing decisions (interest), accounting methods (depreciation and amortization), and tax environments to give buyers a cleaner picture of a business's operating profitability.
Formula:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Or, starting from operating income:
EBITDA = Operating Income (EBIT) + Depreciation + Amortization
Why EBITDA Matters in Business Sales
EBITDA is the foundation of the most common valuation method: the EBITDA multiple. Buyers take your EBITDA and multiply it by an industry-specific factor to arrive at a purchase price.
Business Value ≈ EBITDA × Multiple
A business with $1M EBITDA selling at a 5x multiple would have an enterprise value of $5M.
What Affects the EBITDA Multiple?
Higher multiples come from:
- Recurring revenue (subscription, retainer, or contract-based)
- Low customer concentration (no single customer > 20% of revenue)
- Strong growth trajectory (consistent YoY growth)
- Transferable business (runs without the owner)
- Clean financials (audited or reviewed statements)
Lower multiples come from:
- Owner-dependent operations
- Declining revenue
- High customer concentration
- Undocumented processes
EBITDA vs. SDE
For smaller businesses (under ~$500K annual profit), buyers often use SDE (Seller's Discretionary Earnings) instead of EBITDA. SDE adds back the owner's full compensation and personal expenses, reflecting the total economic benefit to a single owner-operator.
EBITDA is more appropriate when the business already has — or will have — professional management in place.
Adjusted EBITDA
Buyers and sellers often negotiate Adjusted EBITDA, which adds back non-recurring expenses or one-time costs that won't continue after the sale. Common add-backs include:
- Owner salary above market rate
- Personal expenses run through the business
- One-time legal fees or restructuring costs
- COVID-related losses or grants
The goal of adjusted EBITDA is to present a normalized picture of true ongoing earnings.