EBITDA, earnings before interest, tax, depreciation and amortisation, is the number most often used to value owner-managed businesses. It gets quoted constantly and understood rarely. If you are thinking about a sale, it is worth knowing what it really measures and why buyers adjust it.
What it is trying to capture
EBITDA is an attempt to show the underlying, repeatable profit a business generates from its operations, stripped of financing decisions, tax positions and accounting choices. Buyers use it because it lets them compare businesses and apply a valuation multiple to a clean profit figure.
Why buyers “adjust” it
The reported profit in your accounts is rarely the number a deal is based on. Buyers normalise it, adding back costs that will not continue and stripping out one-offs, to arrive at maintainable EBITDA:
- Owner salary and benefits above a market rate for the role
- Genuinely one-off or exceptional costs
- Personal expenses run through the business
- Non-recurring income that should not be counted
How it shapes value
Value is usually maintainable EBITDA multiplied by a multiple that reflects risk and quality, recurring revenue, low owner dependency and a stable team all push it up. That means two businesses with identical profit can be worth very different amounts. The lesson for owners is simple: a clean, defensible EBITDA and a lower-risk business are worth preparing for, long before you go to market.
