EBITDA
Last reviewed 2026-05-11 by Asad Ali, Founder & CEO
Earnings Before Interest, Taxes, Depreciation, and Amortization.
EBITDA strips out financing decisions (interest), tax jurisdictions (taxes), and non-cash accounting choices (depreciation, amortization) to approximate operating cash performance. It is widely used in M&A and valuation because it allows comparison across companies with different capital structures, tax situations, and asset bases. Small businesses often sell for 2–6x EBITDA (lower for personal services, higher for tech and recurring-revenue businesses); middle-market deals are typically 5–10x. "Adjusted EBITDA" (also called normalized or seller's discretionary earnings, SDE) further adds back owner compensation above market rate, one-time legal or restructuring costs, and other non-recurring items to show what the business would earn under a new owner. EBITDA has well-known limitations: it ignores CapEx needed to maintain the asset base, working capital changes, and the real cost of debt — so a heavily capital-intensive business can show strong EBITDA while burning cash.
Formula
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization. Adjusted EBITDA = EBITDA + Owner-related Add-backs + One-time/Non-recurring ItemsExample
A business reports Net Income of $100,000, with $15,000 interest expense, $25,000 income taxes, $10,000 depreciation, and $5,000 amortization. EBITDA = $100,000 + $15,000 + $25,000 + $10,000 + $5,000 = $155,000. Adjusted EBITDA further adds back $40,000 of above-market owner salary (the owner pays themselves $120,000 but the market rate for the role is $80,000) and $8,000 in one-time legal fees from a settled lawsuit. Adjusted EBITDA = $155,000 + $40,000 + $8,000 = $203,000. At a 4x multiple, the business valuation moves from $620,000 (unadjusted) to $812,000 (adjusted) — a material difference.
Why It Matters for Your Business
EBITDA is the most common metric used to value small businesses, so understanding it is essential if you ever plan to sell or attract investors.
Practical Tips
- •Document every add-back used in Adjusted EBITDA with receipts, contracts, or bank statements — buyers and their auditors will challenge unsupported items
- •Track EBITDA margin (EBITDA ÷ Revenue) as a trend — single-year snapshots can mask deterioration in unit economics
- •Don't use EBITDA as a substitute for cash flow in capital-intensive businesses — Warren Buffett famously calls it "ignorant cash flow" for ignoring CapEx
- •Begin normalizing your books 2–3 years before a sale — buyers heavily discount EBITDA shown only in the final pre-sale year
Common Questions About EBITDA
How is ebitda calculated?
The formula is: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization. Adjusted EBITDA = EBITDA + Owner-related Add-backs + One-time/Non-recurring Items. See the worked example below for a step-by-step calculation using realistic numbers.
What is an example of ebitda?
A business reports Net Income of $100,000, with $15,000 interest expense, $25,000 income taxes, $10,000 depreciation, and $5,000 amortization. EBITDA = $100,000 + $15,000 + $25,000 + $10,000 + $5,000 = $155,000. Adjusted EBITDA further adds back $40,000 of above-market owner salary (the owner pays themselves $120,000 but the market rate for the role is $80,000) and $8,000 in one-time legal fees from a settled lawsuit. Adjusted EBITDA = $155,000 + $40,000 + $8,000 = $203,000. At a 4x multiple, the business valuation moves from $620,000 (unadjusted) to $812,000 (adjusted) — a material difference.
Why does ebitda matter for my business?
EBITDA is the most common metric used to value small businesses, so understanding it is essential if you ever plan to sell or attract investors.
How does FiscalInsights help with ebitda?
FiscalInsights tracks ebitda automatically as part of its AI bookkeeping workflow. Connect your bank accounts and the platform handles categorization, reconciliation, and reporting without manual entry.
Related Terms
More Business Terms
Accounts Reconciliation
Ensuring account balances match between different records.
Break-Even Point
The sales volume at which total revenue exactly equals total costs — neither profit nor loss.
Financial Statements
Reports summarizing financial performance and position.
Fixed Costs
Expenses that remain constant regardless of production.
Variable Costs
Expenses that change with production or sales volume.
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