EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization, meaning the profit before interest, taxes and depreciation on both tangible and intangible assets. The figure reflects a company's operating earning power.
Its value lies in comparison. Because financing, taxes and depreciation are stripped out, businesses can be set side by side, regardless of how they are financed or how much they recently invested.
In a business valuation, EBITDA is one of the most important figures, above all in the multiples method. There the EBITDA is multiplied by a sector-typical factor to derive a value.
What matters is the adjusted EBITDA. One-off effects, unusual income, an inflated or missing owner's salary and private expenses are removed. This creates a realistic picture of the sustainable earning power, close to the actual profitability of the business.
One point stays worth watching: EBITDA deliberately ignores investments. A business with old machinery can show a good EBITDA and still soon need large replacement investments. The cash flow then looks different too. That is why it is a strong figure, but not the only one.
For business sellers
For you as a seller, a cleanly calculated, adjusted EBITDA is often the key to a good price. It makes the true earning power of your business visible and carries any price negotiation.
The adjustment is especially worthwhile for owner-run businesses. If you have paid yourself a low salary or run private costs through the company, that distorts the figure. A fair adjustment works in both directions.
For corporate buyers
As a buyer, you look closely at the adjusted EBITDA. It shows you what the business really earns operationally. A high EBITDA on paper helps you little if it is inflated by one-off effects. Points like these surface at the latest during due diligence.
And don't forget that EBITDA ignores investments. Factor upcoming replacement investments into your calculation, otherwise the business looks more profitable than it really is for you.
Example
A retail business reports an EBITDA of 140,000 euros. After adjusting for a low owner's salary and private costs, 110,000 euros remain. At a sector-typical factor of 4, this gives a company value of around 440,000 euros.
FAQ
What does EBITDA stand for?
For Earnings Before Interest, Taxes, Depreciation and Amortization, meaning profit before interest, taxes and depreciation. The figure shows operating earning power.
What is the difference between EBITDA and profit?
Profit, the net income, is what remains after all costs. EBITDA adds back interest, taxes and depreciation and thus shows the pure operating performance.
What does adjusted EBITDA mean?
An EBITDA with one-off effects, private costs and an unrealistic owner's salary removed. Only this adjusted EBITDA reflects the sustainable earning power realistically.
Why is a high EBITDA alone not enough?
Because it ignores investments. A business can show a strong EBITDA and still soon need larger replacement investments. These belong in every honest calculation, alongside a look at the cash flow.
Why does EBITDA matter more when buying than when founding?
When buying, EBITDA shows what the existing business already earns today. That is the basis for price and financing. A start-up has no EBITDA at first, because the earnings still have to be built up. Whoever takes over a business starts with running figures instead of from scratch.
Is EBITDA even relevant for small businesses?
Yes, precisely there. Because small businesses are financed differently and the owner's salary varies widely, adjusted EBITDA is what makes them comparable. It is one of the most important figures when it comes to price and financing.
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