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EBITDA EBITDA
Also called earnings before interest taxes depreciation and amortization, adjusted EBITDA.
Earnings before interest, taxes, depreciation and amortization: a rough proxy for operating cash generation, used to size debt capacity, value businesses and set covenants.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
Start at net income, then add back the four items in the name. Interest comes out because the point is to measure the business before its financing decisions. Taxes come out because they vary with structure. Depreciation and amortization come out because they are non-cash.
Adjusted EBITDA goes further, adding back items the parties argue will not recur or are not really business costs: owner compensation above market, one-time legal or settlement costs, personal expenses run through the company, discontinued lines. Each add-back is a claim about the future, and each is negotiated.
In smaller acquisitions the equivalent measure is seller's discretionary earnings, which adds back a full owner's salary on the theory that a buyer-operator replaces the owner. The two are not interchangeable, and a business marketed on SDE looks a third larger than the same business measured on EBITDA.
Where this one catches people
EBITDA is not cash flow and was never meant to be. It ignores working capital swings, capital expenditure and debt service, which are the three things that actually empty a bank account. A business with growing EBITDA and receivables growing faster is running out of money while its headline number improves.
Worked through
Net income $120,000; add interest $30,000, taxes $18,000, depreciation $60,000, amortization $12,000. EBITDA is $240,000. Adding back a documented one-time legal settlement of $25,000 and $40,000 of owner salary above a market replacement wage gives adjusted EBITDA of $305,000, if both are supported by the returns rather than by a spreadsheet.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
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EBITDA — common questions
What does ebitda mean?
Earnings before interest, taxes, depreciation and amortization: a rough proxy for operating cash generation, used to size debt capacity, value businesses and set covenants.
Where does ebitda catch people out?
EBITDA is not cash flow and was never meant to be. It ignores working capital swings, capital expenditure and debt service, which are the three things that actually empty a bank account. A business with growing EBITDA and receivables growing faster is running out of money while its headline number improves.
Is ebitda the same as an interest rate?
EBITDA is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does ebitda apply to?
Term Loan, SBA Loan, Asset-Based Lending.
Is there a worked example of ebitda?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside ebitda?
Add-back, Cash flow, Covenant, Debt service coverage ratio, Leverage Ratio.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.