EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization.
EBITDA strips out financing decisions (interest), tax jurisdictions (taxes), and accounting methods (depreciation, amortization) to show operating performance. It's commonly used for business valuations—small businesses often sell for 2–6x EBITDA depending on industry, growth rate, and risk. While useful for comparison, EBITDA doesn't account for capital expenditure needs or working capital requirements.
Formula
EBITDA = Net Income + Interest + Taxes + Depreciation + AmortizationExample
A business with $100,000 net income, $15,000 interest, $25,000 taxes, and $10,000 depreciation has EBITDA of $150,000—a buyer offering 4x EBITDA would value the business at $600,000.
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.
Related Terms
More Business Terms
Accounts Reconciliation
Ensuring account balances match between different records.
Break-Even Point
The sales volume at which revenue equals costs.
Budget
A financial plan estimating income and expenses.
Financial Forecast
A prediction of future financial performance.
Capital Expenditure
Funds used to acquire or upgrade physical assets.
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