EBITDA
Also called: earnings before interest, tax, depreciation and amortisation
A measure of profit that strips out interest, tax, depreciation and amortisation, in order to show what the trading operation earns before financing and accounting decisions are applied to it.
The four things EBITDA removes are all things that vary between businesses for reasons unrelated to how well the business trades. Interest depends on how the business was funded. Tax depends on structure and jurisdiction. Depreciation and amortisation depend on what was bought, when, and how it is being written down. Two identical businesses can report very different net profits because of these, so EBITDA is used when the point is to compare the trading itself.
That is why it appears in every sale conversation. Businesses of this kind are typically valued as a multiple of EBITDA, so it becomes the number a price is built from. A buyer is not paying for last year's profit; they are paying for a normalised, repeatable earnings figure and applying a multiple that reflects how safe they think it is.
"Normalised" and "adjusted" are where the real work happens. Adjusted EBITDA adds back things a new owner would not incur — an above-market owner's wage, a personal vehicle, one-off legal costs. Every one of those adjustments is legitimate in principle and negotiable in practice, and a buyer will test each of them.
The known weakness of EBITDA is that it ignores the cost of keeping the business running. A business with equipment that must be replaced every five years has a real cost that EBITDA does not show. This is why it is read next to cash flow, not instead of it — a business can post a healthy EBITDA and still not generate the cash to survive.
What it tells you
What the trading operation itself earns, before funding and accounting choices — and, if you are ever selling, the number a buyer's offer will be built from.
See Exit Ready →See also
Goodwill
The part of a business's sale price that is not accounted for by its physical and identifiable assets — what a buyer pays for the earnings the business will keep producing after the sale.
Break-even
The level of revenue at which a business covers all of its costs and makes neither a profit nor a loss — the point where everything above it starts to be worth something.
Wages percentage
Total wages expressed as a percentage of revenue over the same period — the standard measure of what a business spends on people to earn what it earns.
A definition tells you what the word means. It can't tell you whether it's your problem — that takes a look at the actual business.
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