Mergers & Acquisitions

What Is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It reflects a company’s operating performance by excluding non-operational expenses, offering a clearer picture of its cash-generating ability. For business owners, EBITDA is often the starting point for valuation discussions and deal structuring.

Why Private Equity Firms Rely on EBITDA

Private equity firms use EBITDA as a proxy for operating cash flow. It allows them to compare companies across industries and geographies without the distortion of financing structures or tax regimes. By applying a multiple to EBITDA—based on industry benchmarks and growth potential—they estimate a company’s enterprise value

How EBITDA Is Calculated

The basic formula is:

EBITDA=Net Income+Interest+Taxes+Depreciation+Amortization\text{EBITDA} = \text{Net Income} + \text{Interest} + \text{Taxes} + \text{Depreciation} + \text{Amortization}

This calculation is typically derived from the income statement and adjusted to remove non-recurring or discretionary items

Why Buyers Adjust EBITDA

Buyers often perform quality of earnings reviews to normalize EBITDA. Their goal is to ensure the metric reflects sustainable, recurring profitability. Adjustments help identify risks, correct overstatements, and align valuation with actual performance.

Common EBITDA Adjustments

Owner compensation above market rates
One-time expenses (e.g., legal settlements, restructuring costs)
Non-recurring revenue (e.g., large one-off contracts)
Personal expenses run through the business
Changes in accounting policies or inventory valuation

These adjustments can significantly impact the final purchase price

Impact on Purchase Price

Since valuations are often based on an EBITDA multiple, even small adjustments can lead to substantial changes in price. For example, a $500,000 reduction in EBITDA at a 6x multiple results in a $3 million drop in valuation.

Negotiation Tips to Protect Your Price

Prepare a defensible EBITDA: Work with your accountant or legal advisor to present a clean, well-supported EBITDA calculation.
Anticipate adjustments: Identify and explain any non-recurring items upfront.
Document everything: Keep detailed records of expenses, contracts, and accounting decisions.
Hire experienced advisors: Engage M&A counsel and financial experts who understand private equity diligence.
Negotiate earnouts or holdbacks: If adjustments are likely, structure the deal to protect upside potential.