What is EBITDA?
EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortisation.
It's a key measure of your business's underlying profitability as it allows lendors, investors, credit agencies and acquirers to compare your business's health versus others.
Removing interest, tax, depreciation and amortisation matters because of the way they can distort your profits:
- Interest paid varies depending on the size of your borrowings, your credit history, your sector, and your country
- Taxes vary depending on your country's tax policies, and how effectively you can mitigate legal schemes to reduce your tax bill
- Depreciation and Amortisation are charged on a huge range of assets from intellectual property to cars, and the treatment of each varies massively from business to business, industry to industry, and the company's re-investment approach
How To Calculate EBITDA
You can use one of two formulas using information from your Profit and Loss Statement.
- EBITDA = Profit After Tax + Corporation Tax + Interest + Depreciation + Amortisation
- EBITDA = Profit Before Tax + Interest + Depreciation + Amortisation
Note, when calculating your EBITDA, you should only use interest paid on the debts and corporation tax.
As best practice, you should ask your accountant to include the EBITDA figure on your P&L. You should also ask them to calculate your EBITDA Margin - your EBITDA number divided by your income number. This tells you what percentage of your sales turn into cash to pay down debts and reinvest in your business.
How To Calculate Adjusted EBITDA
Adjusted EBITDA is mainly used by potential acquirers to work out the underlying profits for the business without the owner.
To calculate your adjusted EBITDA, first calculate your EBITDA. Then determine what the business would cost to run if you appointed a Managing Director or similar to run it in your place, and you took no money from the business.
The two key adjustments are:
- The difference between an employee's remuneration and your remuneration. If the employee is more expensive, this will reduce your adjusted EBITDA. Remember to allow for Employer's NICs in the calculation, penisions, bonuses etc.
- Owners perks - money or benefits you take from the business that an employee wouldn't get. For example, perhaps you run a very expensive car through the business, or have golf club costs paid by the company, or travel first class.
How to use EBITDA to calculate your business's value
If you completed the section "Addback Owner Perks", then you've calculated the Adjusted EBITDA for your business. This is the EBITDA your business would generate if someone was running the business on your behalf (and before you pay yourself anything).
You can use the rule-of-thumb table below to estimate the value of your business. Simply take the adjusted EBITDA figure from above and multiply it by the multiple for your sector to get your estimated value.
For a more in-depth understanding of valuation techniques, have a read of my article: "How To Value A Business - A Guide For Owners"
If you want a more accurate valuation, then click here to take the business valuation assessment. It takes about 13 minutes to complete.
EBITDA Valuation Multiples By Industry
You can get a quick-and-dirty valuation for your business by multiplying your adjusted EBITDA by the multiple for your industry from the table below. These multiples are based on analysis of 80k+ companies by the team at Value Builder Systems.
EBITDA Business Valuation
Multiplying your EBITDA by the relevant multiple from the table above gives you a starting point for a valuation.
In reality thought it's pretty meaningless, because valuing your company is like valuing your favourite Top Trump card or your car : each one is unique and is only worth what someone else is willing to pay for it.
To properly value your company, you need to look at it through the eyes of a prospective buyer, and understand the multiple they will use for your company.
When you sell your car, buyers check for rust and damage to the body work, and check the tread on the tyres. They open the bonnet to look at the engine. They start the car, and take it for a test drive, push every button, flick every lever.
Buyers will check your business in a lot of detail too before they part with their money.
The data we've collected from the acquision offers made to the 80,000+ users of the Value Builder System shows there are 8 attributes that buyers check closely, and are willing to pay a premium for.
Based on our quantitative research of over 80,000 businesses, achieving a Value Builder Score of 80+ will make your company 71% more value than an average business with the same EBITDA
Join 80,000 other savvy owners, and get your Business Valuation Score now to discover:
- How well you're performing in each of the eight areas
- How your company compares against others from your sector
- How much your company is worth today
- How much your company could be worth if you improve your Value Builder Score.
Click on the big button below to get your score now (it only takes about 13 minutes).