EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortisation – a key profitability metric used in valuations.
Full Definition
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) is a widely used measure of a company's operating performance and is central to most M&A valuations.
Calculation: EBITDA = Operating Profit + Depreciation + Amortisation Or: Net Profit + Interest + Taxes + Depreciation + Amortisation
Why EBITDA matters in M&A:
- Approximates operating cash flow (pre-capex)
- Facilitates comparison between companies
- Removes effects of capital structure and tax
- Basis for Enterprise Value multiples
- Used in earn-out calculations and debt covenants
Adjusted EBITDA: Buyers typically adjust reported EBITDA for:
- Non-recurring items (litigation, restructuring)
- Owner-related expenses (excessive salaries, personal expenses)
- Pro forma adjustments (full-year effect of changes)
- Normalisation adjustments (market-rate rent, arm's length contracts)
Limitations of EBITDA:
- Ignores capital expenditure requirements
- Doesn't reflect working capital needs
- Can be manipulated through aggressive accounting
- Not a GAAP measure
In UK SME transactions, businesses typically trade at 3-8x EBITDA depending on size, sector, and growth profile.
Related Terms
Enterprise Value
The total value of a business including both equity and debt, representing the price to acquire the entire entity.
Multiple
A valuation ratio comparing price to a financial metric, such as revenue or EBITDA, used to value businesses.
Normalised Earnings
Adjusted profit figures removing one-off, non-recurring, or owner-specific items to show sustainable profitability.
Valuation
The process of determining the economic worth of a business for sale, investment, or other purposes.