What Is EBITDA?
EBITDA is the number most buyers use to decide what your business is worth. Here is what it means in plain English, with two simple examples.
The Money Your Business Makes from Doing the Work.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. In plain words, it is the profit your business makes from its everyday work, before a few costs that come from loans, taxes, and accounting rules. Buyers like it because it lets them compare one company to another on a level playing field.
EBITDA (ee-bit-dah), noun: Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of a company's operating profit. It is calculated by taking net income and adding back interest, taxes, depreciation, and amortization. Put another way, it is revenue minus the everyday costs of running the business.
INTEREST
What you pay the bank on loans. A new owner may pay for the business differently, so buyers leave it out.
TAXES
Income taxes depend on the owner and the state, not on how well the business runs, so they are left out too.
DEPRECIATION
Trucks and tools wear out. Accountants count a little of their cost each year. It is a paper expense, not cash leaving this year.
AMORTIZATION
The same idea as depreciation, for things you cannot touch, like a customer list or a brand you bought.
Start with a Lemonade Stand.
You sell $100 of lemonade on Saturday. Here is where the money goes.
A buyer looks at the $40. That number shows how good the lemonade business is, no matter who lent the money for the stand or how old the wood is.
Now Make It an HVAC Company.
Same math, bigger numbers. Here is a made-up HVAC company with $10 million in yearly sales.
Add-backs are costs a new owner would not have. When they are documented and backed up by clean books, buyers count them. When they are not, buyers ignore them.
Buyers Pay a Multiple of EBITDA.
Most buyers price a business as EBITDA times a number, called a multiple. Using the HVAC example and a multiple of 5 to keep the math simple:
MESSY BOOKS
CLEAN BOOKS, DOCUMENTED ADD-BACKS
Same company, same customers, same trucks. A $2,000,000 difference, just from showing the real number. Every extra dollar of EBITDA you build can be worth several dollars when you sell. The multiple here is for illustration only. Real multiples vary with size, trade, recurring revenue, and how well the business runs without you.
Why $5M+ EBITDA Changes Who Buys and What They Pay.
Buyers sort companies into tiers by EBITDA. Crossing $5M moves you from a company someone adds to their platform to a company they build a platform around.
UNDER $1M EBITDA
Usually bought by individuals, search funds, or local competitors. Fewer buyers, more seller financing, and the lowest multiples.
$1M TO $5M EBITDA
Add-on territory. Private equity platforms buy these companies and fold them into a larger business. Interest is strong, but the buyer sets most of the terms.
$5M+ EBITDA
Platform territory. Private equity firms look for companies this size to build around, which brings more bidders, larger financing, and the highest multiples.
More bidders means competition. Competition means a higher multiple, better terms, and more say in your role after the sale. The same dollar of EBITDA is worth more on the far side of the line. Exact thresholds and multiples vary by trade and market conditions.
Find Out What Your Numbers Say.
Take the free Exit Readiness Scorecard. Financial clarity is one of the five drivers it measures.