EBITDA
Buy a BusinessEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) strips out financing decisions, tax jurisdictions, and non-cash accounting charges to produce a capital-structure-neutral measure of operating profitability. It is the universal language of mid-market business valuation — the number that multiples are applied to, and the starting point for most acquisition underwriting.
How it works. Starting from net income, add back interest (financing choices vary by buyer), taxes (rates depend on entity structure and jurisdiction), depreciation and amortization (non-cash charges that reflect past capital spending, not current cash outflows). The result is a proxy for the cash the business generates from operations before the owner decides how to finance and structure it.
| Line item | Amount |
|---|---|
| Net income | $500,000 |
| + Interest expense | $50,000 |
| + Income taxes | $120,000 |
| + Depreciation | $60,000 |
| + Amortization | $20,000 |
| EBITDA | $750,000 |
EBITDA is not cashflow. It excludes capital expenditures (maintenance capex eats real cash), working-capital changes, and one-time items. Treat it as a starting point for valuation, not the final word on what a business can pay you. For businesses under ~$2M in revenue, SDE is the more relevant metric.
For how EBITDA is used in acquisition pricing, see how to value a business. For verifying that reported EBITDA is real and sustainable, see due diligence and quality of earnings.