What is EBITDA and Why Is It Important for Business Owners?

A number of our clients have sold all or portions of their business to private equity groups, industry roll up firms, individual buyers, and even their competitors.

Some form of EBITDA was a factor in every sale.

If you want to get the maximum value from your business, you have to look at the same metrics that your buyer will. Otherwise, you’ll leave value on the negotiating table and your buyer will benefit at your expense.

EBITDA is an acronym for “Earnings Before Interest, Taxes, Depreciation and Amortization.” It’s a way to compare the gross profitability of one company to another. This is regardless of owner debt, tax profile, and some other unique factors that may not be reflective of the business itself.

EBITDA is a way to look at profits before these expenses of interest, taxes, depreciation, and amortization in order to more clearly determine what a buyer may be willing to pay for those profits.

Oftentimes you’ll also hear the word “multiple” in reference to a rough value of a company. For example, a company with an EBITDA of $1M and a potential “multiple” of three could lead to a rough business valuation of $3M. Both the framework of using an EBITDA and the formula of multiplying by some number to determine a business value is generic at best. The number of valuation factors unrelated to EBITDA are significant.

However, by understanding how EBITDA is calculated and the concept of multiples to arrive at value, you CAN strategically plan for selling your business with these factors in mind.

So here’s what you can do right now: ask your CERTIFIED FINANCIAL PLANNER™ or CPA or business consultant how EBITDA and multiples apply to your industry and the size of your business.

The content and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you consult your accountant, tax, or legal advisor with regard to your individual situation. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. Past performance is no guarantee of future results. The opinions and views expressed here are for informational purposes only. Please consult with your tax and/or legal advisor for such guidance. Investment advisory services offered through Catalyst Wealth Management, LLC doing business as Ridgeline Private Wealth. Catalyst Wealth Management, LLC and Ridgeline Wealth, LLC are not affiliates.