EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization — is one of the most commonly used metrics in business valuations. But when it comes to selling a business, understanding Adjusted EBITDA is just as important.
In this article, we’ll break down what EBITDA really means, how it’s calculated, what adjustments buyers expect, and how to use this knowledge to maximize your company’s value in a sale.
What is EBITDA?
EBITDA is a measure of a company’s operating performance. It strips out variables like capital structure, tax strategy, and non-cash accounting expenses to provide a clearer view of how much profit a business generates from its core operations.
Because it standardizes earnings, EBITDA is especially useful when comparing businesses across different industries, ownership structures, or locations.
Buyers often start their valuation process with EBITDA — but that’s just the starting point.
What Does EBITDA Stand For?
- Earnings – The company’s net profit after all expenses.
- Interest – Added back because it reflects financing choices, not operations.
- Taxes – Removed for standardization, since tax rates and strategies vary.
- Depreciation – A non-cash charge related to tangible assets.
- Amortization – A non-cash charge for intangible assets like goodwill or patents.
How to Calculate EBITDA
There are two common formulas:
- EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
- EBITDA = Operating Income (EBIT) + Depreciation + Amortization
Here’s a simplified example:
- Net Income: $1,300,000
- Interest Expense: $200,000
- Taxes: $400,000
- Depreciation: $150,000
- Amortization: $50,000
EBITDA = $1,300,000 + $200,000 + $400,000 + $150,000 + $50,000 = $2.1 million
This gives buyers a clearer picture of the business’s earnings before the influence of financing, tax structure, or accounting choices.
Why EBITDA Matters in a Business Sale
EBITDA is the foundation of the most widely used valuation formula in M&A:
Enterprise Value = EBITDA × Multiple
The multiple depends on industry, size, growth, customer concentration, and risk. A small services company might trade at 3–4× EBITDA, while a larger firm in a high-demand niche could command 6–8× or more.
But here’s the critical point: buyers rarely use raw EBITDA. They base their valuations on Adjusted EBITDA.
Why Adjusted EBITDA Is What Buyers Actually Care About
Adjusted EBITDA accounts for personal, discretionary, or non-recurring expenses that would not continue under new ownership. Buyers use this number to estimate the company’s normalized earnings power.
Common EBITDA Adjustments Include:
- Owner’s salary above market rate
- Personal vehicles or travel
- Family members on payroll
- One-time legal or consulting fees
- Unusual COVID-related costs or subsidies
- Special bonuses or charitable donations
Adjusted EBITDA allows buyers to focus on the true, repeatable cash flow of the business — not what it produced for a specific owner under specific circumstances.
A Note of Caution:
Sellers should be conservative when determining adjustments to EBITDA. Every addback will be reviewed and verified during due diligence, and aggressive or poorly supported adjustments can undermine credibility or stall the deal. It’s better to present a defensible, well-documented Adjusted EBITDA than to inflate the number and risk losing buyer trust.
Why This Matters:
Let’s say your reported EBITDA is $2.5 million. After reasonable adjustments, your Adjusted EBITDA is $3.2 million. If buyers are paying 6×, that’s a $4.2 million increase in value ($15M vs. $19.2M) — as long as those adjustments stand up to scrutiny.
EBITDA vs. Other Financial Metrics
While EBITDA is a widely used benchmark, it’s not the only one that matters in a business sale:
- Net Income – Includes all expenses, taxes, and interest. Too noisy for valuation.
- Operating Income (EBIT) – Similar to EBITDA, but includes depreciation and amortization.
- Free Cash Flow – Useful for assessing the ability to fund growth or distributions.
Buyers may review all of these, but EBITDA — specifically Adjusted EBITDA — remains the central figure in deal negotiations.
How to Improve EBITDA Before a Sale
Improving EBITDA (and its quality) before going to market can dramatically increase your company’s value. Some strategies include:
- Cut non-essential costs – Review vendor contracts, streamline headcount, and improve productivity.
- Increase recurring revenue – Buyers favor predictable revenue over one-off projects.
- Eliminate key-person risk – Build systems that don’t rely solely on you or a single leader.
- Clarify financials – Prepare clean statements with clear addbacks so buyers trust the numbers.
A Final Word on EBITDA
Understanding “what is EBITDA for a business sale” is more than knowing a formula — it’s about presenting your business in a way that buyers will value. That means focusing on Adjusted EBITDA, identifying legitimate addbacks, and telling the story behind the numbers.
Just as important, be conservative and honest in your approach. Inflated or poorly documented adjustments will not survive buyer due diligence — and could reduce offers or even derail the deal.
At Marsh Creek Advisors, we help business owners calculate, defend, and present their EBITDA the right way — so they can sell with confidence and without regret.
Thinking about a sale?
We offer a complimentary valuation for business owners generating over $1 million in EBITDA. It’s a no-pressure way to understand what your business might be worth — and what you can do to increase its value.
📞 Contact us today at 404-436-1071 or click here to schedule a confidential conversation.
