M&A Glossary
EBITDA: what it is and how to calculate it
EBITDA is operating profit plus depreciation and amortisation. It shows how much cash the business itself generates, before interest, tax and the way assets are written down. In transactions it is the starting point for valuation, because it lets you compare two companies regardless of how they are financed and how they account for fixed assets.
How EBITDA is calculated
There are two routes to the same number. In transaction practice both are used, as a cross-check.
Top down
- Revenue
- less operating costs
- excluding depreciation
- = EBITDA
Bottom up
- Net profit
- plus income tax
- plus interest
- plus depreciation and amortisation
- = EBITDA
What it strips out
- the effect of borrowing
- the effect of tax rates
- depreciation policy
- leaving the operating result
The difference between EBIT and EBITDA is depreciation and amortisation, nothing else. EBIT is after it, EBITDA before.
Reported EBITDA versus normalised EBITDA
A company is almost never valued on the EBITDA straight from the income statement. It is valued on normalised EBITDA, cleaned of one-off events and of costs the buyer will not incur.
Typical adjustments on the seller side: owner remuneration above or below market rate, a car or property used privately, a one-off legal case, the cost of the sale process itself. Typical buyer-side adjustments run the other way: a role that will have to be filled, understated replacement capex, below-market rent paid to a related party.
This conversation is one of the most important moments in the negotiation. At a multiple of six, every hundred thousand of accepted adjustment is six hundred thousand of price.
Why price equals EBITDA times a multiple
The EBITDA multiple is shorthand for how many years of operating profit a buyer will pay up front. Its level depends on the sector, the recurrence of revenue, dependence on the owner and how many buyers are realistically looking at the company.
The result is enterprise value, not the amount that lands in the seller’s account. Debt is deducted and working capital is adjusted to get to equity value.
Frequently asked
Questions we get about EBITDA.
What is the formula for EBITDA?
Net profit plus income tax, plus interest, plus depreciation and amortisation. Alternatively: operating profit (EBIT) plus depreciation and amortisation.
How does EBITDA differ from EBIT?
Only by depreciation and amortisation. EBIT is the result after deducting it, EBITDA before. In asset-heavy businesses the gap can be substantial.
What if EBITDA is negative?
Then an EBITDA multiple does not apply and other methods are used, such as a revenue multiple or an asset-based valuation. Negative EBITDA does not rule out a sale, but it changes the pool of buyers and the structure of the price.
See also
- M&A glossary - 72 terms used in transactions
- How we run a company sale
- How we work and how we charge