EBITDA
Definition
Earnings before interest, taxes, depreciation and amortization. It approximates operating profit and is the number buyers and lenders most often use to value a business.
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Formula
EBITDA = Net Income + Interest + Taxes + Depreciation + AmortizationEBITDA strips out financing, taxes and non-cash charges so you can compare the operating performance of businesses on equal footing. If you ever plan to sell or raise debt, it is the number the conversation will center on.
Buyers will also adjust it for one-off and owner-related costs, so clean, well-categorized books make a real difference to your valuation. Watch for: EBITDA that looks healthy while cash is tight, since it ignores inventory build-up and loan payments.
Example
$180,000 net income plus $20,000 interest, $15,000 taxes and $25,000 depreciation gives $240,000 of EBITDA.