Definition
EBITDA stands for earnings before interest, tax, depreciation and amortisation. It approximates operating profit before financing choices, tax and the non-cash charges for assets wearing out, so that businesses with different debts and asset bases can be compared. It is not cash flow: it ignores capital spending, changes in working capital and the tax that still has to be paid.
Depreciation and amortisation spread the cost of long-lived assets over the years they are used. They reduce profit without any cash leaving the business in that year.
Working capital is the money tied up in running a business day to day, mainly stock and money owed by customers, less money owed to suppliers. A sale needs to agree how much of it comes with the business.
Worked example
Kestrel Freight Pty Ltd is a fictional Australian logistics business. Its profit and loss statement shows net profit before tax of A$600,000, after interest of A$50,000, depreciation of A$150,000 on its trucks and amortisation of A$20,000 on software.
EBITDA = A$600,000 + A$50,000 + A$150,000 + A$20,000 = A$820,000.
The business also replaces about A$150,000 of trucks every year. That spending is real cash leaving the business, even though EBITDA leaves it out.
Net profit before tax is what a business earns after all its costs, including interest and depreciation, but before tax on its profits. It is the starting point for SDE and EBITDA.
Why buyers care
Brokers and advisers quote EBITDA because it is a common basis for pricing established businesses. But a truck fleet, a commercial kitchen or a production line wears out, and the replacement cost comes out of your cash, not out of the seller's EBITDA. For asset-heavy businesses, compare EBITDA with several years of capital expenditure before you rely on it.
Check which kind of EBITDA you are looking at. Reported EBITDA comes straight from the accounts. Adjusted EBITDA adds normalising adjustments. Some listings show a figure called EBITDA that is really SDE, with the owner's pay added back. The Loupe feed labels each listed profit figure as SDE, EBITDA or net profit so you can compare like with like.
A business broker markets businesses for sale and manages the process on the seller's behalf. The broker is usually paid by the seller, mostly when a deal completes.
Capital expenditure is spending on assets that last more than a year, such as equipment, vehicles and premises. It uses cash but reaches the profit and loss account only gradually, through depreciation.