EBITDA

Definition

EBITDA — earnings before interest, taxes, depreciation and amortization — measures a business’s operating profitability before financing decisions, taxes, and certain accounting conventions around depreciation.

In French-language Quebec documentation, you’ll see BAIIA (Bénéfice avant intérêts, impôts et amortissements) used for the same concept.

EBITDA is neither net income nor available cash. It doesn’t account for interest on debt, required equipment investments, or working capital changes, for example.

Why EBITDA matters in a business sale

EBITDA is often the first number buyers look at. It’s generally the base to which a valuation multiple is applied to estimate a value range.

For example, a business with $500,000 in EBITDA and a 4x multiple would be valued around $2 million.

Before using EBITDA for valuation, it’s common to normalize it — adjusting certain expenses or revenues to reflect the business’s recurring profitability under new ownership.

EBITDA also plays a practical role in financing. A buyer and their lender want to know if the business generates enough profitability to support acquisition debt and keep operating without strain.

What EBITDA doesn’t tell you on its own

A high EBITDA doesn’t automatically guarantee high value. Buyers also look at:

• customer concentration
• margin stability
• owner dependency
• required future investments
• working capital quality

Two businesses can show similar EBITDA but not warrant the same value — if one depends on three major customers or on an owner who’s hard to replace.

What every seller should know

• EBITDA isn’t an official accounting number — it’s calculated from financial statements
• Stable or growing EBITDA over 3 to 5 years reinforces the credibility of the value you’re defending
• Normalization adjustments (owner salary, personal expenses, non-recurring expenses) can change the value significantly
• EBITDA is a useful starting point for discussion, but its quality matters as much as its level