EBITDA is one of those acronyms that sounds more complicated than it is. Earnings Before Interest, Taxes, Depreciation, and Amortization. Say that five times fast. Here is the thing: the concept is simple: it's a measure of how profitable your core business operations are, ignoring how you finance things and how you account for equipment.
While net profit is a common standard, relying on it alone can obscure operational efficiency. Two businesses with identical operating performance can show vastly different net income figures based on their interest payments and depreciation practices. EBITDA helps level the playing field by stripping away these non-operational variables.
Here's why that matters. Two bakeries can sell the same amount of bread. Bakery A bought its ovens with cash. Bakery B financed them with a loan. Bakery A has higher net income because it has no interest payments. But they're the same business operationally. EBITDA captures that reality.
The Formula
EBITDA = Revenue - Operating Expenses (excluding interest, taxes, depreciation, amortization)
Or more practically: Net Income + Interest + Taxes + Depreciation + Amortization
Why Buyers Care
When someone buys a business, they pay a multiple of EBITDA. Not net income. Not revenue. EBITDA. A business generating $200,000 in EBITDA might sell for $600,000 to $1,000,000 depending on the multiple (typically 3-5x). The same business with high depreciation might show only $100,000 in net income, which looks less impressive. Knowing your EBITDA number puts you in a stronger position when negotiating a sale.
Why Lenders Care
Banks look at your EBITDA-to-interest coverage ratio. If your EBITDA is $100,000 and your annual interest payments are $20,000, your coverage ratio is 5x. Most lenders want to see at least 2x. Anything below that and they get nervous about lending you more money.
What EBITDA Does Not Tell You
It isn't cash flow. It ignores capital expenditures, debt payments, and changes in working capital. A business with great EBITDA can still run out of cash if it's buying equipment or paying down loans. Use the EBITDA Calculator to find your number, then check the Cash Flow Calculator for the full picture.
EBITDA and Your Business Valuation
This is where it gets practical. Once you know your EBITDA, you can estimate what your business is worth on the market. Use our Business Valuation Calculator which uses EBITDA multiples as one of its methods. Knowing both your EBITDA and your valuation puts you in control when opportunities come up.
Calculate your EBITDA now with our free EBITDA Calculator. It takes two minutes and might change how you look at your own business.
Frequently Asked Questions
Earnings Before Interest, Tax, Depreciation and Amortization.
Shows true profitability. Lenders use it to assess loan repayment ability. Buyers value it because it strips out financing costs and non-cash expenses, giving a clearer picture of core business health. A business generating $200K in EBITDA can command 3-5x multiples when selling.
Good EBITDA margin varies by industry: 10-15% is average, 15-25% is good, and above 25% is excellent. Service businesses typically exceed 25% due to lower overhead, while retail or manufacturing often fall in the 10-15% range.
Quick Answer
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) measures your business's core profitability by excluding financing decisions and accounting choices. It equals Net Income + Interest + Taxes + Depreciation + Amortization. A 20% EBITDA margin means your operations generate $0.20 of profit for every dollar of revenue, making it a key metric for lenders and buyers who typically value businesses at 3-5x EBITDA. Unlike profit, which can vary wildly based on accounting methods, EBITDA gives a clearer picture of operational performance.