EBITDA
EBITDA (earnings before interest, taxes, depreciation, and amortization) is a profitability metric that measures a business's operating earnings before financing costs, income taxes, and the non-cash charges that write down fixed assets and intangibles, calculated as net income plus interest expense, income tax expense, depreciation, and amortization. Unlike Seller's Discretionary Earnings, EBITDA is stated after the compensation the business actually paid whoever runs it, which makes EBITDA the earnings basis buyers use when a company will be operated by hired management rather than by the buyer personally.
Also called Earnings Before Interest, Taxes, Depreciation and Amortization, Reported EBITDA, Unadjusted EBITDA · Last updated 2026-08-07 · All 24 terms
The two ways to build it, and why they must agree
EBITDA can be assembled from the bottom of the income statement upward or from operating income downward, and a recast that is internally consistent produces the same number both ways.
Take a light manufacturer with revenue of $8,600,000 and reported net income of $612,000. Add back interest expense of $148,000, income tax expense of $196,000, depreciation of $310,000 and amortization of $74,000. EBITDA is $612,000 + $148,000 + $196,000 + $310,000 + $74,000 = $1,340,000, a 15.6 percent EBITDA margin.
Check it the other way. Operating income is EBITDA less D&A: $1,340,000 - $384,000 = $956,000. Subtract interest of $148,000 to get $808,000 of pre-tax income, then tax of $196,000, and the result is back at $612,000 of net income. The two routes tie only when nothing sits below the operating line except interest and tax; a gain on an asset sale, non-operating rental income or an equity-method pickup breaks the reconciliation and has to be shown as its own line rather than buried.
In this example the company already pays a president a fully loaded $240,000 at a defensible market rate, so no compensation adjustment arises. Had the owner been taking $600,000 in salary and benefits for the same job, EBITDA would understate ongoing earnings by the $360,000 of excess, and correcting that is exactly what Adjusted EBITDA does.
What EBITDA deliberately ignores
EBITDA is not cash flow, and treating it as cash flow is the most expensive mistake made with the metric. It is stated before four real obligations: interest, taxes, capital expenditure and changes in working capital.
The capital expenditure gap is the one that bites in the lower middle market. Adding back $384,000 of depreciation and amortization does not mean the trucks, presses and racking will not need replacing. For an asset-heavy business, carry EBITDA less maintenance capital expenditure alongside the headline figure, because that is closer to what a lender's fixed-charge coverage test actually measures.
Working capital is the second gap. A business growing 25 percent a year consumes cash in receivables and inventory that never appears in EBITDA, which is why most middle-market purchase agreements set a working capital target at close and true up against it — see working capital adjustment. Smaller Main Street asset sales more often sidestep the issue by excluding receivables and payables from the transaction altogether.
EBITDA is also not a GAAP measure. No accounting standard defines it, which is why the SEC constrains how public filers present it (Regulation G and Item 10(e) of Regulation S-K) and why private-company deals, which face no such constraint, produce so much variance in what any given schedule calls EBITDA.
Where EBITDA shows up in a deal
EBITDA surfaces at four points, and the definition tightens at each one. The confidential information memorandum quotes the seller's EBITDA. The buyer's letter of intent prices off a number the buyer has restated. A quality of earnings provider re-tests it line by line and usually lands lower. The credit agreement then defines EBITDA contractually, in words, and that written definition governs the covenants for the life of the loan.
The trigger for moving from SDE to EBITDA is management, not size: once the business runs without the owner, the buyer is acquiring earnings rather than a job. Deals in the $5,000,000 to $25,000,000 enterprise value range are typically quoted on EBITDA.
Multiples rise with size, quality and buyer type. As of 2026, businesses with $1,000,000 to $3,000,000 of EBITDA are commonly quoted in a 4x to 6x range, moving higher as EBITDA passes $5,000,000 and as recurring revenue, customer diversification and management depth improve. That is a convention rather than a benchmark; price a live deal against current transaction data, and see EBITDA multiple.
EBITDA, Adjusted EBITDA and SDE on one company
Change one fact about the manufacturer above: the owner runs it personally and takes $600,000 in salary and benefits for the job a president would do at a $240,000 fully loaded cost. Everything else is identical.
EBITDA falls to $980,000, because EBITDA is stated after whatever the business actually paid and the extra $360,000 of owner pay is a real operating expense in the reported figures. Adjusted EBITDA adds back that $360,000 of compensation above market and lands at $1,340,000 — exactly where the professionally managed version of the same company reported, which is what normalizing is for. SDE adds back the owner's entire $600,000 rather than the excess, so SDE is $1,580,000 — exactly $240,000 above Adjusted EBITDA, which is the fully loaded cost of the replacement manager.
Three figures, one company, no disagreement about the facts. They differ only in what each assumes about who runs the business and at what cost, which is why a multiple quoted without its basis carries no information. In practice a company at $1,340,000 of Adjusted EBITDA would be priced on EBITDA; the SDE figure is computed here only to make the size of the gap visible.