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.
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Holly also founded ExitPromise.com and to date has answered more than 2,000 questions asked by business owners about starting, growing and selling a business.