EBITDA Meaning

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

The EBITDA Formula - How To Calculate EBITDA

You can use one of two formulas using information from your Profit and Loss Statement.  

  1. EBITDA = Profit After Tax + Corporation Tax + Interest + Depreciation + Amortisation
  2. 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 - that's 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.

Calulate your EBITDA and Adjusted EBITDA using the tool below (it doesn't record of save any of your data). 

Alternatively, if you want a calculator spreadsheet for your personal use, go HERE ... 

EBITDA Calculator

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"

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.  

How Do Buyers Calculate the EBITDA Multiple?

Multiplying your EBITDA by the relevant multiple from the table above gives you a starting point for a valuation.

In reality though it's not super helpful, because valuing your company is like valuing your favourite Top Trump card or a vintage 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 apply to your EBITDA. 

When you sell a 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, take it for a test drive, push every button, and flick every lever. They're terrified of buying a jalopy that's going to breakdown and cost them a fortune to repair soon after they drive it away.

Somone buying a company is no different. They're going to check your business in a lot of eye-watering, time-consuming and pain-staking detail before they part with their cash.

In the meantime, you can use my Calculator Spreadsheet to determine your EBITDA and an estimated value for your company based on your sectors average multiple...

Get the EBITDA Calculator Spreadsheet

The spreadsheet shows five year graphs of EBITDA, Adjusted EBITDA, EBITDA % and Adjusted EBITDA %, and calculates your average EBITDA to help you calculate your company's value (using the average multiples above).  

Click the button below and leave your details, and and my magic system will email you the spreadsheet.

Use the Calculator to keep track of your EBITDA, Adjusted EBITDA and company value