The letters “EBITDA” get tossed around in business settings on a regular basis. But what exactly does it mean, and what is its purpose?
Definition
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. In other words, it measures the true profitability of the company before other factors are added to it. It is a useful tool for comparing different types of businesses in various industries, because it strips the profit down to its very basics. It is a tool for estimating the performance of a company, which is the most attractive aspect for a buyer.
Middle-market companies are defined by their EBITDA. Small businesses are considered so if they have less than $1,000,000 EBITDA, while middle-market companies have over $1 million.
Use in M&A
Sellers can use EBITDA to improve the presentation of the company’s earnings. The profit is more attractive when it is presented in terms of earnings without the removal of taxes and other elements.
Oftentimes in M&A deals, the purchase price of a company is defined in multiples of EBITDA. Buyers can use it to assess the business’ performance.
If you would like to find out the EBITDA of your company, contact an M&A intermediary for a valuation. George & Company would be happy to help.
