What Is EBITDA, and Why Does a Buyer Care About It More Than Your Profit?

EBITDA is earnings before interest, tax, depreciation and amortisation. It’s your operating profit with the financing and the accounting adjustments stripped out, which is why buyers and investors use it: it shows what the business itself earns, before the way it’s been funded or written down. Businesses are bought and sold as a multiple of it.

This is for owners of established businesses who’ve heard the word from an accountant, an investor or a buyer and nodded along. I own and invest in businesses, and I’ve sat on more than 20 boards. EBITDA is the number I look at first, and this is why.

What does EBITDA stand for?

• Earnings: your profit.
• Before
• Interest: what you pay on loans and finance, added back.
• Tax: corporation tax, added back.
• Depreciation: the amount your accounts write off your vans, machines and equipment each year, added back.
• Amortisation: the same write-off for intangible things, like software or goodwill you bought, added back.

So the formula is simple:

EBITDA = profit before tax + interest + depreciation + amortisation

Every one of those figures is in your statutory accounts and your management accounts. If your accountant can’t give you EBITDA in five minutes, that’s a conversation on its own.

Why do buyers use EBITDA instead of profit?

Because profit depends on things that have nothing to do with how good the business is.

Two identical businesses, same sales, same margin, same team. One owner bought the premises with a loan and has new vans on finance; the other rents and leases. The first shows lower profit, because of the interest and depreciation. The business isn’t worse. It’s funded differently. EBITDA takes that out so a buyer can compare the two.

It also strips out tax, which changes with the Budget rather than with your performance, and the write-downs, which are accounting decisions rather than cash leaving the bank.

What a buyer wants to know is: how much cash does this business generate from what it does, before anyone decides how to fund it or how to account for it? That’s EBITDA. Then they multiply it. The multiple is the price of trust: how safe and transferable that profit is. If you want to see what that does to the value of your own business, the business valuation calculator does the sums.

What is adjusted EBITDA?

This is the one that matters for an owner-managed business, and it’s the one most owners have never worked out.

Adjusted (or normalised) EBITDA is EBITDA as a buyer would see it after you’ve gone. Two adjustments do most of the work:

1. Your own pay. If you pay yourself £40,000 and dividends because that’s tax-efficient, but it would cost £90,000 to hire a managing director to do your job, a buyer takes the £50,000 difference off. If you pay yourself £150,000 for a job worth £90,000, they add £60,000 back. The business is valued on what it earns with a market-rate person running it, not on your tax planning.
2. One-offs. A legal case, a relocation, a bad debt, a year of double rent. If it genuinely won’t repeat, it’s added back. If you’ve had a “one-off” every year for five years, it isn’t one.

Smaller adjustments: family members on the payroll who don’t work there, personal costs through the business, rent you pay yourself above or below market rate.

Adjusted EBITDA = EBITDA + what you pay yourself − a market-rate managing director + genuine one-offs

Do this honestly, because the buyer will, and their accountant will find everything.

Why EBITDA isn’t cash, and why that catches owners out

EBITDA is before interest and tax, and those still have to be paid. It’s also before capital expenditure: the new machine, the fit-out, the fleet. A business with £300,000 EBITDA that has to spend £150,000 a year on equipment to stand still isn’t generating £300,000.

That’s why I’d never run a business on EBITDA alone. EBITDA tells you what the business is worth to someone else. The 13-week cash flow forecast tells you whether you can make payroll on the 28th. You need both, and owners who only watch one get a surprise from the other.

EBITDA, margin and what you get paid

Here’s where it comes back to you. Revenue is vanity, profit is sanity, and EBITDA is what a buyer pays for. But none of them is what lands in your account.

Your pay comes out of what’s left at the bottom. Revenue at the top, cost of delivering the work off, overheads off, then interest, then tax, and the owner gets whatever remains. An owner can have record turnover, decent EBITDA and still get paid last. I go through the order to fix that in how to pay yourself as a business owner, and the profit margin calculator shows the margin your business needs to cover the overheads and still pay you.

So treat EBITDA as a scorecard for two things at once: what the business is worth, and whether it’s producing enough to pay the person carrying it.

Questions owners ask

What’s a good EBITDA margin? EBITDA as a share of revenue varies too much by sector for a single answer. Compare with businesses like yours: your accountant, your trade body, or competitors’ accounts at Companies House. The better question for an owner is whether it’s growing, and whether it’s enough to pay you.

Is EBITDA the same as operating profit? Close. Operating profit (EBIT) is before interest and tax but after depreciation and amortisation. EBITDA adds those two back as well.

Do small businesses need to report EBITDA? No. It isn’t a statutory figure. It’s a management and valuation measure, which is why every owner thinking about a sale, investment or a management buyout should know theirs.

Does EBITDA include the owner’s salary? It includes whatever you actually paid through the P&L. Adjusted EBITDA replaces it with what the job is worth.

I’m Dr Lewis Haydon, a business coach and mentor in Birmingham, UK. I own and invest in businesses, and I work with owners of established businesses from about £250k turnover, scaling to £1m and on to £20m, on the numbers that decide what the business is worth and what it pays them. If you want to know what your EBITDA says about your business, bring it to a virtual coffee.