EBITDA
Operating profit before financing, tax, and non-cash charges, used as the earnings base most buyers of lower-middle-market companies price against.
Also called: Earnings before interest, taxes, depreciation and amortisation
EBITDA strips four things out of net income: interest, taxes, depreciation, and amortisation. The logic is that all four say more about the current owner than about the business. Interest reflects how this owner financed the company, taxes reflect their entity structure and personal situation, and depreciation and amortisation are accounting allocations of money spent in earlier years. A buyer arriving with different debt, a different tax profile, and a fresh asset basis wants the number underneath all of that.
It is not cash flow, and treating it as cash flow is the single most common valuation error. EBITDA ignores capital expenditure, working capital swings, and the actual cash cost of debt. A company with heavy equipment replacement cycles can post healthy EBITDA and convert very little of it to cash. Buyers know this, which is why capex intensity and working capital behaviour get scrutinised even when the headline multiple is agreed.
For businesses below roughly two to three million dollars of earnings, many buyers price on SDE instead, because a single owner-operator drawing a market-rate salary is the difference between the two measures. Above that range, EBITDA after a real management salary becomes the standard, because the buyer expects to hire a manager rather than run the company personally.
From net income to EBITDA
Net income: 640,000
Add back interest: 95,000
Add back income taxes: 210,000
Add back depreciation: 180,000
Add back amortisation: 25,000
EBITDA: 1,150,000
This is unadjusted EBITDA. Owner add-backs come next, and they are the part a buyer will argue about.
Where sellers get caught
- Quoting EBITDA while your books still run the owner's vehicle, phone, and family payroll through operating expenses — a buyer will find them and will wonder what else is in there.
- Comparing your EBITDA multiple to a headline from a public company or a hundred-million-dollar transaction. Those are different markets with different buyer pools.
- Presenting EBITDA without capex history when the business is equipment-heavy.
Common questions
Is EBITDA the same as cash flow?
No. EBITDA excludes capital expenditure, changes in working capital, debt principal, and cash taxes. A profitable business on an EBITDA basis can still be cash-hungry, which is why buyers look at free cash flow conversion separately.
Should I use EBITDA or SDE for my business?
It depends on whether the buyer expects to run the company themselves. If the value assumes an owner-operator, SDE is the honest base. If the business already pays for management and the buyer will keep that team, EBITDA after a market-rate salary is the right base. Presenting both, clearly labelled, avoids an argument later.
Related terms
Adjusted EBITDA
EBITDA restated to remove one-off, non-market, and non-recurring items so the number reflects how the business will run under a new owner.
SDE
EBITDA plus one owner's compensation and discretionary benefits, used to price businesses a buyer intends to run personally.
Add-backs
Expenses added back to reported earnings because they are personal, one-time, or would not exist under a new owner.
EBITDA multiple
The factor applied to adjusted earnings to produce enterprise value, set mainly by size, industry, growth, and how dependent the business is on its owner.
Revenue multiple
Enterprise value expressed as a multiple of annual revenue, used mainly where margins are standardised or earnings are not meaningful.
Guides that use this term
Where ebitda comes up in a real sale, and what it changes.
Last reviewed 2026-08-25. General information for business owners, not legal, tax, or financial advice — terms, thresholds, and tax treatment vary by jurisdiction and by deal.