Holly founded ExitPromise.com and has answered more than 3,000 questions asked by business owners about growing and selling a valuable business.She has also authored articles for FORBES and Intuit and been featured in podcasts for organizations such as the International Business Brokers Association.
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The Definition of EBITDA: It is an acronym for Earnings Before Interest Taxes Depreciation and Amortization. EBITDA is often used as a measure of a business’s cash flow. Also it is used frequently in many business valuation formulas, depending on the business’s specific industry.
For example, the value of a business may be defined as a multiple of EBITDA. If the industry multiple is six (which would be very good), then the value of a business in such an industry would be six times the business’s EBITDA. Many other factors, not just industry type, impact the multiple applied to EBITDA for business valuation purposes.
How to Calculate EBITDA
To calculate EBITDA, start with the Net Profit shown on the bottom of the business’s Profit and Loss Statement, or alternatively the Taxable Income shown on the bottom of the business’s tax return. This is the Earnings figure or starting point.
Add to this Earnings figure the following:
- Interest Paid to banks, financing companies, vendors, supplier, lenders and the business owners;
- Taxes paid on the Income of the business. Do not add sales taxes paid or employment taxes paid on behalf of the business’s employees or employer-related payroll taxes;
- Depreciation deducted on the Profit and Loss Statement or Tax Return. If your business elected to take a Code Section 179
- Deduction on the tax return, this should be added as well; and
- Amortization deducted on the Profit and Loss Statement or Tax Return. The Amortization expense figure is usually found in Miscellaneous Expenses and is not shown separately on the first page of the tax return.
Learn more about EBITDA
EBITDA – What is its impact on when you should sell a business?
In the response to Royce above you mention the Section 179 depreciation would not be able to be added back to EBITDA based on income derived from an 1120-S. However in Jacques question above, are you recommending to add the Section 179 back in on another form of business tax return?
I’m confused on when to add the 179 depreciation back when using a tax return as the only source of income verification.
Hi Tennis,
Okay, hopefully I can straighten this out for you!
In Royce’s calculation of EBITDA, he’s working from the net taxable income that will be reported to the S Corp’s shareholders on their respective K-1’s. The 179 deduction for an S Corp is not a deduction on the front page of the 1120 S tax return. So adding it back to the net income of the S Corp would not be correct when calculating EBITDA. No deduction for the 179 depreciation, therefore no addback!
As for Jacques’ situation, he’s trying to calculate EBITDA from his Profit and Loss Statement and in his particular case, the accountant had not yet recorded the depreciation for the current year. Again, no deduction for the 179 deduction, therefore no addback. In the case where the depreciation has been recorded on the P&L, then the depreciation deduction (179 or other depreciation) would be added back to calculate EBITDA.
If the tax return is the source of the income verification you’re using to calculate EBITDA, you only addback depreciation if was recorded as a deduction from the net income you’re starting with.
Does this make sense now?
Hello,
We received a one-time consultancy service for a new business area. The content of the consultancy is how the operation will proceed, and the determination of the product price and quantities. Is it possible to consider this expense as “restructuring cost” in the income statement as non-operating charges? Because The restructuring charge is the cost incurred by the company when they reorganize the business’s operations to improve the overall efficiency and longer-term profit. It is a short-term expense required to make the company profitable in the long run. Restructuring charges are considered non-operating charges as they are not considered under operating charges and are very infrequent.
Hi Eray,
It’s not unusual to take a one-time consultant’s fee as an addback to EBITDA.
If it’s not a recurring expense, you’ve got a good defense for adding it back as an adjustment to EBITDA.
All the best…