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M&A Explained

What Is EBITDA?

A plain-English answer, and why it matters when you actually sell.

Short answer: EBITDA is earnings before interest, taxes, depreciation, and amortization. It is a measure of a business's core operating profit, stripped of financing and accounting choices, and it is the number most buyers apply a multiple to when they value a company. In a business sale, your normalized EBITDA times an industry multiple is the headline price.

Why EBITDA matters when you sell

EBITDA matters when you sell because it is the closest simple proxy for the cash a buyer inherits. Two businesses with the same revenue can have very different EBITDA, and the buyer pays for EBITDA, not revenue. The catch is that raw EBITDA off your tax return usually understates the real number, because owner-run businesses carry personal expenses and one-time costs that a new owner will not. That is why the version that matters is adjusted or normalized EBITDA, after legitimate add-backs.

Below roughly $2M in earnings, smaller owner-operated businesses are often valued on SDE instead, which adds your salary back. Above that, EBITDA is the standard. Getting the basis right is worth more than arguing the multiple.

Frequently asked questions

Is EBITDA the same as profit?
No. Net profit is after interest, taxes, and non-cash charges like depreciation. EBITDA adds those back to show core operating performance, which is why buyers use it to compare businesses on an apples-to-apples basis.
What is a good EBITDA multiple?
It depends entirely on the industry, recurring revenue, and owner dependence. Small businesses commonly sell for 2 to 6 times EBITDA; licensed, recurring-revenue businesses reach 6 to 15 times on the right buyer.
What are EBITDA add-backs?
Legitimate one-time or owner-specific costs added back to show the true earnings a buyer inherits: above-market owner salary, personal vehicles, one-time legal fees, and similar. Defensible add-backs raise your sale price directly.

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