EBITDA is a common term in the field of Mergers and Acquisitions, and it forms the basis for most business deals. EBITDA is a common term in mergers and acquisitions, and it is often used in valuation.
The EBITDA Acronym
EBITDA stands for earnings before interest, tax, depreciation, and amortization. It measures the cash flow of a business without accounting for any interest payments or income, tax bills, or any non-cash expenses.
This invaluable measurement is a sum of the company’s overall financial portfolio through analyzing the sales of their goods and services. The reason this term is common in the merger and acquisition industry is due to the role it plays in business valuation.
Adjusted EBITDA Explained
Adjusted EBITDA is simply a twist on the measurement. If a business owner takes a salary that is larger than the industry standards, a potential buyer might want to add back part of that salary to EBITDA in order to arrive at a more reasonable level of earnings. There are many other instances in which owners will add back adjustments to EBITDA such as cars, gas, health club memberships, and other owner related expenses. There is no set standard for adjusted EBITDA. During the process of creating a deal, the buyer and seller must agree on what the adjusted EBITDA is.
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