EBITDA valuation: what the four letters take out, and what a buyer puts back
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Every figure here comes from the figures you enter and the method stated beside it: your document count, your own hourly worth, your expected price. This site publishes no valuation, no tax position and no legal opinion; what a clause means for your deal is your solicitor's and your accountant's.
EBITDA exists to let two businesses be compared without their financing, their tax position and their accounting choices about depreciation getting in the way. That makes it useful and it makes it easy to abuse, because everything it removes is a real cost to somebody. A buyer uses it as a starting point and then adds back what the owner ran through the business and subtracts what the owner does not pay for and they will. This page is about that second step, which is where the argument actually is.
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EBITDA business valuation starts by stripping four things out
Interest, because how the current owner financed the business is not how the buyer will. Tax, because it depends on structure and jurisdiction rather than on trading. Depreciation and amortisation, because they are accounting allocations of money spent in earlier years. What is left is intended to be the cash the operation generates before any of those choices. It is not cash flow, because it ignores what the business must keep spending on equipment and working capital to stay where it is.
Adjusted EBITDA, and the add backs a buyer will actually accept
An add back is defensible when it is genuinely non-recurring or genuinely personal to the seller: an owner's above-market salary, a family car, a one off legal case, a relocation. It is not defensible when it is the ordinary cost of running the business described as unusual. Every add back needs its own evidence, and a schedule of them with documents attached is worth more in a negotiation than the same list asserted. Sellers lose credibility on the third unsupported add back and buyers discount the rest.
Valuation based on ebitda, and where the multiple actually comes from
The multiple is drawn from what comparable businesses changed hands for, adjusted for size, growth, concentration and owner dependence. Smaller businesses trade at lower multiples than larger ones in the same trade, consistently, because they carry more of all four risks. Valuing a business based on ebitda without adjusting for size is the single most common way an owner arrives at a number the market will not support.
Ebitda margin and what it signals to a buyer
The margin is EBITDA as a share of revenue, and its usefulness is comparative rather than absolute. Against the sector it says whether the business converts revenue efficiently. Against its own history it says whether that is improving or being bought with discounts. A business whose margin has fallen while revenue grew is telling a buyer something about pricing discipline, and it is better to explain it than to let diligence discover it.
Will it do what you need for EBITDA valuation?
Tell us where you are in selling your business and what you are trying to keep track of.
EBITDA valuation: common questions
What is the difference between adjusted ebitda and ebitda?
EBITDA is a calculation from the accounts. Adjusted EBITDA is that figure after add backs for costs the buyer will not inherit, so it is a negotiated number rather than a reported one. Because it is negotiated, the schedule of adjustments matters more than the total, and public companies presenting such measures do so under rules requiring the reconciliation to be shown (17 CFR Part 244).
What is a business valuation ebitda multiple built from?
Transactions in the same trade, adjusted for the things that differ. Size first, then growth, customer concentration, owner dependence and the quality of the records. A multiple quoted without those adjustments is a sector average being applied to a specific business, which is where most disappointment at offer stage comes from.
How do you do an ebitda calculation from a set of accounts?
Start at operating profit, then add back depreciation and amortisation. If you start at net profit instead, add back interest and tax as well. Then list the adjustments separately rather than folding them in, because a buyer will want to see the reported figure and the adjusted one side by side with every step between them.
Does using ebitda to value a company work for every business?
No. It suits businesses whose earnings are stable and whose capital spending is modest and predictable. It suits capital hungry businesses badly, because the depreciation it removes is a genuine and recurring cost of staying in business, and it suits a loss-making growth business not at all.
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