Any business owner considering a sale cannot escape four letters: EBITDA. In practice, this single metric determines almost entirely what purchase price a business achieves — and yet many owners only come to understand what lies behind the term during the live sale process. A costly knowledge gap.
What EBITDA means — and why it matters
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. The underlying idea is straightforward: when comparing businesses, one must compare like with like. Interest burden, tax charges and depreciation policies vary so considerably between companies that they distort the underlying operating result. EBITDA strips precisely these factors out, revealing what the business genuinely earns from its core operations.
A capital-intensive engineering business with substantial fixed assets and correspondingly high depreciation charges would, without this adjustment, show a significantly lower net profit than a comparable services business — even if both are operationally equally strong. EBITDA creates comparability. That is why it is the language in which M&A transactions are negotiated worldwide.
The calculation formula with a worked numerical example
The calculation follows a clear schema derived from the profit and loss account:
+ Income tax expense 280,000 €
+ Net interest expense 45,000 €
+ Depreciation & Amortisation 255,000 €
This business therefore generates an EBITDA of €1.2 million — irrespective of how it is financed, the tax regime it operates under and the extent to which its fixed assets are depreciated. This figure is precisely the starting point for purchase price negotiations.
Adjusted EBITDA: the critical normalisation for buyers
In practice, the analysis goes one step further. Buyers and their advisers do not merely examine the EBITDA from the statutory accounts — they calculate what is known as Adjusted EBITDA. In doing so, all one-off effects and non-operational items are removed in order to arrive at the genuine, sustainable earnings capacity of the business.
Typical adjustments include:
- Owner-manager remuneration above market rate: Many principals pay themselves more or less than a hired managing director would cost. The difference relative to a market-rate salary is adjusted.
- Private costs run through the business: Company vehicle for a spouse, private travel recorded as business travel — such items increase the adjusted EBITDA.
- Non-recurring exceptional costs: Restructuring charges, extraordinary legal disputes or one-off investments that will not recur.
- Non-recurring exceptional income: Property disposals, insurance recoveries or subsidies that do not form part of ongoing trading activity.
Adjusted EBITDA can differ materially from accounting EBITDA — in either direction. Those who are unaware of this difference and fail to present it professionally are either leaving purchase price on the table or losing credibility during Due Diligence.
EBITDA multiples: what your business is truly worth
The purchase price is calculated by multiplying the adjusted EBITDA by a sector-specific multiple. These multiples vary considerably — depending on the sector, growth rate, market position, customer retention and the quality of management. Businesses in high-growth or regulated sectors typically command higher multiples than those in more mature or capital-intensive industries.
Every improvement to adjusted EBITDA is amplified by the leverage of the multiple — all the more reason to work actively on earnings capacity two to three years before the sale. A reliable assessment of the achievable multiple requires an individual analysis of the business and the prevailing market environment.
What EBITDA does not show — and why this matters
Useful as EBITDA is, it has blind spots that experienced buyers know very well. Capital expenditure intensity is one: a business with high investment requirements in machinery or infrastructure carries a similar EBITDA to a capital-light business — but has materially less free cash at the end of the day. This is why buyers additionally examine free cash flow.
Working capital also remains invisible in EBITDA: high inventory levels or extended debtor days tie up capital and constrain liquidity without appearing in the EBITDA figure. And finally, EBITDA says nothing about growth: a business that grows its EBITDA year on year will almost always command higher multiples than a stagnating one, because buyers pay for future potential — not merely for historical performance.
Those who prepare their business sale professionally know their EBITDA, their Adjusted EBITDA and the relevant multiples in their sector — before the first prospective buyer sits down at the table. Those who have not done this groundwork are negotiating blind.