What is EBITDA? A plain-English guide for small business owners
Buyers, brokers and accountants all use the word. What it means, how it's worked out and why it matters when you sell.
By This article covers financial matters. It's general information to help you ask better questions, not advice for your situation. Velaro isn't a law firm, registered tax agent or licensed financial adviser. Please check anything important with a qualified adviser before you act.
In short
- EBITDA is profit before interest, tax, depreciation and amortisation.
- Buyers look at adjusted EBITDA: one-off and personal costs added back, owner wage normalised.
- It ignores equipment replacement and cash timing, so buyers check those too.
If you've started exploring a sale, you've probably heard the term EBITDA and nodded along. It's simpler than it sounds, and understanding it helps you follow any conversation about value.
What the letters stand for
EBITDA stands for earnings before interest, tax, depreciation and amortisation. In plain terms, it's your profit before loan interest, income tax and the accounting write-down of assets like vehicles and equipment.
It's used because it shows how much the business itself earns from operations, regardless of how it's financed or structured.
How it's worked out
Start with net profit, then add back interest, income tax, depreciation and amortisation. Your accountant can pull this from your profit and loss statement in a few minutes.
Adjusted EBITDA
Buyers usually look at adjusted, or normalised, EBITDA. That means adding back one-off costs and personal expenses run through the business, and adjusting the owner's pay to a market wage.
Every adjustment should be supported by evidence, or a buyer is unlikely to accept it.
Why buyers care
Adjusted EBITDA is a common starting point for valuing established businesses, often multiplied by a figure that reflects risk and growth. For very small businesses, some buyers use a similar measure that includes the owner's full earnings.
Either way, the goal is the same: understand what the business reliably earns.
What EBITDA doesn't tell you
It ignores the cost of replacing equipment and vehicles, which can be significant in trade businesses. It also says nothing about how quickly customers pay.
That's why buyers also look at cash flow and capital spending.
Your checklist
What to do next
- Ask your accountant for your EBITDA for three years
- List possible add-backs with evidence
- Estimate a market wage for your role
- Note upcoming equipment or vehicle replacements
- Compare EBITDA with actual cash generated
Example
A car wash owner's accounts showed modest net profit, largely because of depreciation on new equipment and interest on the equipment loan. His adjusted EBITDA, which added those back along with a one-off repair, gave a clearer picture of what the business earned from operations.
An illustrative example, not a real client or transaction.
Questions owners ask
Is EBITDA the same as profit?+
No. It's profit before interest, tax, depreciation and amortisation, so it's usually higher than net profit.
Why do buyers adjust it?+
To remove one-off and personal items so they can see what the business would earn under new ownership.
Is a higher EBITDA always better?+
Generally, as long as it's real, repeatable and supported by cash in the bank.
Important
This article is general information only. It doesn't take your personal circumstances into account and isn't financial, legal, tax, employment or valuation advice. Velaro Group is a buyer of businesses. It isn't a business broker, licensed financial adviser, registered tax agent or law firm, and it doesn't act for sellers. Please get advice from your own accountant, solicitor or financial adviser before making any decision. Read the full disclaimer.
Keep reading