What is EBITDA?
Earnings before interest, tax, depreciation and amortisation — an attempt to measure what a business earns from operating, before the current owner's financing and accounting choices.
Earnings before interest, tax, depreciation and amortisation. In plainer terms: what the business earns from operating, before the current owner's financing arrangements and accounting choices are applied.
Why each item comes out
| Removed | Because |
|---|---|
| Interest | Reflects how you financed the business, not how a buyer will |
| Tax | Depends on structure and jurisdiction, both of which change |
| Depreciation | An accounting allocation, not a payment |
| Amortisation | Same, usually for acquired intangibles |
What remains is intended to be comparable between two businesses with different balance sheets — which is exactly why buyers use it.
What it does not measure
EBITDA is not cash flow, and treating it as cash flow is the most common analytical error in valuation. It ignores capital expenditure, working capital movements and tax. A business can grow EBITDA every year while its bank balance falls, and several do.
Adjusted EBITDA
The figure used in valuation is almost always adjusted or normalised EBITDA — restated for owner compensation at market rate, genuine one-off costs and non-operating items. Which adjustments a buyer accepts is where most of the negotiation happens, and how EBITDA affects your valuation covers the ones that survive.
If your business is small enough that one owner works in it full time, the relevant figure may be SDE rather than EBITDA — see SDE vs EBITDA.