How to Calculate EBITDA for Business Valuation
How Do You Calculate EBITDA?
EBITDA is calculated by starting with net income and adding back interest, taxes, depreciation, and amortization.
EBITDA Formula
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
For example, if a business has:
- Net income: $300,000
- Interest expense: $30,000
- Income taxes: $70,000
- Depreciation: $40,000
- Amortization: $10,000
The EBITDA would be:
$300,000 + $30,000 + $70,000 + $40,000 + $10,000 = $450,000
So the business has $450,000 of EBITDA.
For business valuation purposes, however, you may also need to calculate adjusted or normalized EBITDA rather than relying only on the reported number.
What Is EBITDA?
EBITDA stands for:
Earnings Before Interest, Taxes, Depreciation, and Amortization.
In simple terms, EBITDA is a way to look at a company’s operating earnings before certain financing, tax, and non-cash accounting expenses are taken into account.
Business buyers and valuation professionals often use EBITDA because it provides a more consistent way to compare businesses with different financing arrangements, tax situations, and depreciation policies.
It is important to remember that EBITDA is not the same thing as cash flow and it is not the same as net income.
The EBITDA Formula
The most common formula is:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Each component has a specific purpose.
Component | What it means |
Net income | Profit remaining after expenses, interest, and taxes |
Interest | Cost of debt financing |
Taxes | Income taxes recorded by the business |
Depreciation | Non-cash expense related to tangible assets |
Amortization | Non-cash expense related to certain intangible assets |
Let’s look at each one.
1. Start With Net Income
Net income is usually the easiest starting point.
You can find it on the company’s income statement, typically near the bottom of the statement.
For example:
Net Income = $300,000
You then add back the expenses that EBITDA is designed to exclude.
Keep in mind that you should use a consistent accounting period. If you’re calculating annual EBITDA, use the corresponding annual financial statements.
2. Add Back Interest Expense
Interest represents the cost of borrowing money.
For example, suppose a company paid:
$30,000 in interest expense
That amount is added back when calculating EBITDA.
Why?
Because EBITDA is intended to measure earnings before the effects of the company’s financing structure.
Two businesses could have similar operations but very different interest expenses because one has more debt than the other.
3. Add Back Income Taxes
Next, add back applicable income tax expense.
For example:
Income tax expense = $70,000
This is added back to net income.
Taxes can vary based on the company’s structure, jurisdiction, tax position, and other circumstances. EBITDA removes the tax component so the earnings figure can be viewed before those effects.
4. Add Back Depreciation
Depreciation is a non-cash accounting expense that spreads the cost of certain tangible assets over their expected useful lives.
For example, a company may purchase equipment for $100,000.
Rather than recording the entire cost as an expense immediately for accounting purposes, the cost may be depreciated over several years.
If the income statement shows:
Depreciation = $40,000
that amount is added back to net income when calculating EBITDA.
However, don’t interpret this to mean that equipment is free or that depreciation has no economic significance.
A business may still need to spend money replacing equipment. That’s one reason EBITDA should not be treated as the same thing as available cash.
5. Add Back Amortization
Amortization is similar to depreciation but is generally associated with certain intangible assets.
Examples can include certain:
- Acquired intellectual property
- Customer-related intangible assets
- Software-related assets
- Other qualifying intangible assets
If amortization expense is:
$10,000
you add that amount back.
EBITDA Calculation Example
Let’s put everything together.
Imagine a business reports the following annual results:
Item | Amount |
Net income | $300,000 |
Interest expense | $30,000 |
Income taxes | $70,000 |
Depreciation | $40,000 |
Amortization | $10,000 |
EBITDA | $450,000 |
The calculation is:
$300,000 + $30,000 + $70,000 + $40,000 + $10,000 = $450,000
The company’s reported EBITDA is therefore $450,000.
How to Calculate EBITDA From Operating Income
You don’t always have to start with net income.
Another common approach is to start with EBIT, or earnings before interest and taxes.
The formula is:
EBITDA = EBIT + Depreciation + Amortization
For example:
- EBIT: $400,000
- Depreciation: $40,000
- Amortization: $10,000
Therefore:
$400,000 + $40,000 + $10,000 = $450,000 EBITDA
This should generally reconcile with the calculation from net income when the financial statements and definitions are being applied consistently.
EBITDA vs. Adjusted EBITDA
This is where business valuation can become more complicated.
Reported EBITDA is the EBITDA calculated from the company’s financial statements.
Adjusted EBITDA goes a step further by making reasonable adjustments for certain items that may not reflect the company’s ongoing operating performance.
For example, a business might have experienced a one-time expense of $25,000 related to an unusual legal matter that is not expected to continue.
If that expense qualifies as a legitimate normalization adjustment, adjusted EBITDA could be calculated as:
Reported EBITDA + qualifying adjustment = Adjusted EBITDA
If reported EBITDA were $450,000:
$450,000 + $25,000 = $475,000 adjusted EBITDA
But an important point is often overlooked:
Not every unusual or personal expense should automatically be added back.
An adjustment should have a reasonable basis and should be supportable.
What Can Be Added Back to EBITDA?
Potential EBITDA adjustments can include certain expenses that are:
- Clearly non-recurring
- Unusual or extraordinary
- Related to a specific event that will not continue
- Non-operating in nature
- Supported by financial records
- Appropriate under the valuation or transaction methodology being used
Examples might include certain one-time professional fees or unusual expenses.
The exact treatment depends on the circumstances.
A business owner should not simply add expenses back because they believe those expenses make the company look less profitable.
What Should Not Automatically Be Added Back?
This is one of the most important parts of calculating EBITDA for valuation.
You should be cautious about adding back:
- Normal operating expenses
- Recurring repairs
- Regular marketing costs
- Ordinary payroll
- Rent required to operate the business
- Recurring professional fees
- Normal insurance expenses
- Expenses that will continue after a sale
- Costs that are necessary to maintain revenue
For example, if a company spends $50,000 every year on marketing, that doesn’t become a legitimate add-back simply because the owner believes a buyer could spend less.
If the business needs that marketing to generate its revenue, removing the expense could overstate the company’s sustainable earnings.
EBITDA Add-Backs vs. SDE Add-Backs
EBITDA and SDE are related concepts, but they should not be treated as interchangeable.
Seller’s Discretionary Earnings (SDE) is often designed around the total economic benefit available to one owner-operator.
EBITDA is generally intended to represent operating earnings before interest, taxes, depreciation, and amortization, without automatically adding back every owner-related expense.
This distinction matters when you’re valuing a business.
For a small owner-operated company, SDE may provide a more useful measure.
For a larger business with management in place, EBITDA may be more appropriate.
See our guide to SDE vs. EBITDA for a more detailed comparison.
How to Calculate Adjusted EBITDA
A simplified calculation looks like this:
Adjusted EBITDA = Reported EBITDA + Qualifying Adjustments
For example:
Item | Amount |
Reported EBITDA | $450,000 |
One-time legal expense | $25,000 |
One-time equipment relocation expense | $15,000 |
Adjusted EBITDA | $490,000 |
This is only an illustrative example.
Whether either expense should actually be added back depends on the facts, documentation, and valuation context.
The goal isn’t to create the highest possible EBITDA.
The goal is to arrive at a reasonable representation of sustainable operating earnings.
Why Normalized EBITDA Matters in Business Valuation
A buyer is generally interested in what the business can reasonably earn going forward.
That means the historical EBITDA may need to be normalized.
For example, suppose a company had a major one-time expense during the year.
Reported EBITDA:
$400,000
Qualifying one-time expense:
$50,000
Normalized EBITDA:
$450,000
That difference could matter significantly if EBITDA is later multiplied by a valuation multiple.
For example, using a purely illustrative 4× multiple:
$400,000 × 4 = $1.6 million
versus:
$450,000 × 4 = $1.8 million
The example demonstrates why the quality of the EBITDA calculation matters.
The multiple and adjustment assumptions are illustrative and should not be treated as a current market valuation range.
How to Calculate EBITDA Margin
EBITDA margin shows EBITDA as a percentage of revenue.
Formula
EBITDA Margin = EBITDA ÷ Revenue × 100
For example, suppose:
- Revenue = $2,000,000
- EBITDA = $400,000
Then:
$400,000 ÷ $2,000,000 × 100 = 20%
The EBITDA margin is 20%.
This can be useful when comparing profitability over time.
For example:
Year | Revenue | EBITDA | EBITDA Margin |
Year 1 | $1,500,000 | $225,000 | 15% |
Year 2 | $1,750,000 | $315,000 | 18% |
Year 3 | $2,000,000 | $400,000 | 20% |
In this example, the business is not only growing revenue but also improving its EBITDA margin.
That can be an important part of understanding the company’s financial performance.
EBITDA Worksheet
You can use this simple worksheet to calculate EBITDA from net income.
Calculation | Your Amount |
Net income | $_____ |
+ Interest expense | $_____ |
+ Income taxes | $_____ |
+ Depreciation | $_____ |
+ Amortization | $_____ |
= EBITDA | $_____ |
Then, if appropriate:
Adjustment | Amount |
EBITDA | $_____ |
+ Qualifying adjustment #1 | $_____ |
+ Qualifying adjustment #2 | $_____ |
– Required normalization | $_____ |
= Adjusted EBITDA | $_____ |
The important part is not simply filling in as many adjustments as possible.
Each adjustment should be reviewed carefully.
Where Do You Find the Numbers Needed to Calculate EBITDA?
The information will generally come from the company’s financial records.
Useful documents may include:
- Income statements
- Profit and loss statements
- General ledger
- Tax returns
- Fixed asset schedules
- Loan statements
- Depreciation schedules
- Accounting records
For valuation purposes, it is often helpful to compare multiple years rather than looking at only one year.
This can reveal whether EBITDA is:
- Growing
- Declining
- Stable
- Highly variable
- Influenced by unusual events
A single year’s EBITDA can tell you something, but several years of financial history can provide much more context.
Should You Use Tax Returns to Calculate EBITDA?
Tax returns can be useful, but they may not provide everything needed for a clean valuation analysis.
A business may use tax accounting methods that differ from the way an acquisition buyer or valuation professional analyzes operating performance.
That’s why EBITDA calculations should generally be reconciled with the company’s financial statements and supporting records.
If the business is preparing for a sale, consistency and documentation become particularly important.
EBITDA and Business Valuation
Once you have a reasonable EBITDA figure, it can be used as an input into certain valuation approaches.
A simplified EBITDA valuation formula is:
Estimated Enterprise Value = EBITDA × Valuation Multiple
For example, if:
- EBITDA = $500,000
- Illustrative multiple = 4×
then:
$500,000 × 4 = $2,000,000
Again, this is an illustration of the calculation—not a statement that businesses with $500,000 of EBITDA are currently worth 4× EBITDA.
The appropriate multiple depends on factors such as:
- Business size
- Industry
- Growth
- Profitability
- Recurring revenue
- Customer concentration
- Management depth
- Owner dependence
- Competitive position
- Financial quality
- Business risk
- Transferability
That’s why calculating EBITDA is only one part of determining what a business may be worth.
EBITDA Is Not the Same as Cash Flow
This distinction is important.
EBITDA excludes depreciation and amortization, but businesses still have to spend money on things such as:
- Equipment
- Inventory
- Technology
- Working capital
- Taxes
- Debt payments
- Capital improvements
A company can therefore have strong EBITDA and still have limited cash available to the owner.
When evaluating a business, don’t stop at EBITDA.
Look at the broader financial picture.
Can EBITDA Be Negative?
Yes.
If a company’s operating earnings are low enough, EBITDA can be negative.
For example:
- Revenue: $1,000,000
- Operating expenses excluding D&A: $1,100,000
The business would have approximately:
-$100,000 EBITDA
A negative EBITDA figure generally indicates that the company’s operations are not currently generating positive earnings before interest, taxes, depreciation, and amortization.
A business with negative EBITDA may still have value because of assets, intellectual property, customers, strategic value, growth potential, or other factors.
But EBITDA-based valuation becomes much more difficult when EBITDA is negative.
Common EBITDA Calculation Mistakes
1. Mixing accounting periods
Don’t combine a full year’s revenue with six months of expenses.
Your calculation needs to use consistent periods.
2. Adding back expenses twice
If an expense has already been excluded or adjusted elsewhere, don’t add it back again.
3. Treating every unusual expense as an add-back
An expense being unusual doesn’t automatically make it a legitimate adjustment.
4. Confusing EBITDA with cash flow
EBITDA is a profitability metric, not a cash balance.
5. Ignoring recurring expenses
If the business will continue to incur an expense after a transaction, removing it can overstate sustainable earnings.
6. Using an unsupported EBITDA number for valuation
A valuation multiple applied to an inflated EBITDA figure can produce a misleading business value.
7. Looking at only one year
A single year’s results may not represent the company’s normal performance.
What Is the Difference Between EBITDA and Net Income?
The biggest difference is that net income includes interest, taxes, depreciation, and amortization, while EBITDA adds those items back.
For example:
Net income = $300,000
Add:
- Interest = $30,000
- Taxes = $70,000
- Depreciation = $40,000
- Amortization = $10,000
Result:
EBITDA = $450,000
Neither number is automatically “better.”
They answer different questions.
Net income shows the company’s profit after these expenses.
EBITDA provides a view of operating earnings before those specific items.
What Is the Difference Between EBITDA and SDE?
The difference largely comes down to how the earnings measure treats the owner and the purpose of the analysis.
SDE is often more appropriate for a small business where one owner is actively involved in running the company.
EBITDA is often more useful when analyzing a business that has enough management structure to operate independently of a specific owner.
The right metric depends on the business.
For a detailed comparison, see SDE vs. EBITDA.
How EBITDA Can Affect Business Value
A higher sustainable EBITDA can potentially increase business value.
There are two ways this can happen.
Higher EBITDA
If the multiple stays the same:
$400,000 EBITDA × 4 = $1.6 million
$500,000 EBITDA × 4 = $2.0 million
Higher EBITDA and a stronger multiple
A business with improving profitability, lower risk, recurring revenue, strong management, and less owner dependence may potentially receive a different valuation multiple.
That means business owners should think about both:
Increasing sustainable earnings
and
Improving the quality of those earnings.
How to Improve EBITDA Before Selling a Business
If you’re considering selling your business, increasing EBITDA can be one of the most direct ways to improve its financial profile.
Possible areas to review include:
- Pricing
- Gross margins
- Unnecessary operating expenses
- Labor efficiency
- Vendor costs
- Customer retention
- Recurring revenue
- Revenue concentration
- Owner dependence
- Management structure
- Financial reporting
The goal shouldn’t be to make the business look artificially profitable for a few months.
A buyer is ultimately interested in sustainable performance.
How Many Years of EBITDA Should You Look At?
There isn’t one universal answer.
For an initial business valuation, looking at several years of financial performance can be useful because it helps identify trends.
You may want to examine:
- Historical EBITDA
- Adjusted EBITDA
- EBITDA margin
- Revenue growth
- Year-over-year changes
- Major one-time expenses
- Changes in customer concentration
- Changes in owner involvement
You can then ask a more important question:
What level of EBITDA is the business reasonably capable of producing going forward?
That is often more useful than simply taking the best historical year.
What If EBITDA Has Been Growing?
Growing EBITDA can be a positive sign, particularly when the growth appears sustainable.
For example:
Year | EBITDA |
Year 1 | $250,000 |
Year 2 | $325,000 |
Year 3 | $425,000 |
That trend tells a different story from a business whose EBITDA has been declining.
However, buyers will usually want to understand why EBITDA is growing.
Is growth coming from:
- More customers?
- Higher prices?
- Better margins?
- A temporary event?
- A single large customer?
- Reduced spending?
- A recurring revenue increase?
The quality and sustainability of growth matter.
A Simple Process for Calculating EBITDA
If you’re calculating EBITDA for your own business, follow this process:
Step 1: Gather your financial statements
Start with the income statement and supporting records.
Step 2: Identify net income
Use the appropriate period.
Step 3: Add interest
Identify interest expense included in the income statement.
Step 4: Add taxes
Add the applicable income tax expense.
Step 5: Add depreciation
Review the depreciation expense.
Step 6: Add amortization
Identify amortization expense.
Step 7: Calculate EBITDA
Use:
Net Income + Interest + Taxes + Depreciation + Amortization
Step 8: Review possible adjustments
Determine whether there are legitimate non-recurring or normalization items.
Step 9: Calculate adjusted EBITDA
Add only adjustments that can be reasonably supported.
Step 10: Consider valuation
Once you have a reasonable EBITDA figure, you can evaluate how it may be used with an appropriate valuation method and multiple.
How to Calculate EBITDA for a New York Business
If you own a business in New York City, Long Island, Westchester County, Rockland County, the Hudson Valley, Northern New Jersey, or Southern Connecticut, calculating EBITDA can help you understand the underlying operating performance of your company and provide a starting point for an EBITDA-based valuation.
The basic EBITDA formula is the same regardless of where your business operates:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
However, calculating a useful EBITDA figure requires more than simply applying the formula.
The financial information needs to accurately represent how the business operates.
Start With Reliable Financial Records
Before calculating EBITDA, gather the financial information necessary to reconcile the company’s earnings.
For a New York-area business, this may include:
- Profit and loss statements
- Balance sheets
- Business tax returns
- General ledger information
- Payroll records
- Interest expense
- Tax expense
- Depreciation
- Amortization
- One-time or unusual expenses
- Owner-specific expenses
- Other potential adjustments
Ideally, review more than one year of financial information.
Looking at multiple years can help identify unusual expenses, changes in profitability, temporary events, and longer-term operating trends.
New York Businesses Can Have Very Different Financial Profiles
The EBITDA calculation itself does not change based on whether a business operates in Manhattan, Long Island, Westchester County, Rockland County, the Hudson Valley, Northern New Jersey, or Southern Connecticut.
But the underlying financial profile can be very different.
For example:
- A professional-services firm in New York City may have substantial employee and professional-service expenses.
- A contractor in Long Island may have significant vehicle, equipment, labor, and project-related expenses.
- A home-service business in Westchester or the Hudson Valley may have a combination of field employees, vehicles, scheduling costs, and marketing expenses.
- A company serving customers across Northern New Jersey or Southern Connecticut may have a broader geographic operating footprint.
These differences do not change the EBITDA formula.
They can affect how the resulting EBITDA should be interpreted.
Calculate Reported EBITDA First
The best starting point is usually the company’s reported earnings.
For example, suppose a hypothetical business has:
- Net income: $400,000
- Interest expense: $50,000
- Taxes: $100,000
- Depreciation: $40,000
- Amortization: $10,000
The calculation would be:
$400,000 + $50,000 + $100,000 + $40,000 + $10,000 = $600,000 EBITDA
This is the company’s calculated EBITDA based on the information in the example.
The next question is whether that figure needs to be normalized.
Review Potential EBITDA Adjustments
After calculating reported EBITDA, review the financial statements for expenses that may not represent normal ongoing operations.
Depending on the circumstances, this could include:
- One-time expenses
- Unusual professional fees
- Extraordinary repairs
- Certain non-operating expenses
- Owner-specific expenses
- Other genuinely non-recurring costs
Each adjustment needs to be evaluated individually.
An expense should not be added back simply because it makes EBITDA higher.
The better question is:
Would this expense reasonably continue as part of normal operations after a change in ownership?
If the answer is yes, it may not be appropriate to remove it.
Be Careful With Owner Expenses
Owner-related expenses can require particular attention when calculating adjusted EBITDA.
For example, an owner may receive compensation or benefits that are above or below what would be typical for the role they perform.
But simply removing all owner compensation from EBITDA can produce a misleading result.
If the owner performs an important operating role and a buyer would need to hire someone to replace that work, the replacement cost may need to be considered.
This is one reason EBITDA normalization should focus on the economics of the business, rather than simply adding back every expense associated with the owner.
New York-Area Businesses Should Keep Supporting Documentation
If you are preparing your company for a potential sale, maintain documentation for significant adjustments.
This can include:
- Original invoices
- Payroll records
- Contracts
- Tax records
- Financial statements
- Explanations of unusual expenses
- Records showing when a one-time event occurred
- Documentation supporting non-operating items
This becomes especially useful when a buyer, lender, accountant, or valuation professional wants to understand how adjusted EBITDA was calculated.
A clean adjustment schedule can make the financial story much easier to follow.
Reported EBITDA vs Adjusted EBITDA
It is useful to distinguish between:
Reported EBITDA
The EBITDA calculated directly from the company’s financial statements.
Adjusted EBITDA
Reported EBITDA after appropriate adjustments intended to remove unusual, non-recurring, or otherwise non-representative items.
The difference between the two should be clearly documented.
For example:
Reported EBITDA: $600,000
Less/add adjustments: +$50,000
Adjusted EBITDA: $650,000
The $50,000 adjustment in this example is illustrative only. It would need to be supported and evaluated before being included in an actual valuation.
EBITDA and Business Value
Once normalized EBITDA has been established, it may be used as an input in an EBITDA-based valuation.
A simplified formula is:
Estimated Enterprise Value = Normalized EBITDA × Appropriate EBITDA Multiple
The multiple is not determined solely by location.
Factors such as:
- Business size
- Revenue growth
- EBITDA margin
- Recurring revenue
- Customer concentration
- Management depth
- Owner dependence
- Competitive position
- Industry risk
- Financial reporting quality
- Transferability
can all influence how a buyer or valuation professional evaluates the business.
Don’t Assume New York Means a Specific EBITDA Multiple
Business owners sometimes search for a specific EBITDA multiple for New York businesses.
There is no single multiple that applies to every company in New York or the surrounding region.
A business in New York City can have a very different valuation profile from a company in Long Island, Westchester, Rockland County, or the Hudson Valley.
The same is true for businesses in Northern New Jersey and Southern Connecticut.
The appropriate multiple should be considered only after understanding the company’s normalized EBITDA and the characteristics that affect its risk and attractiveness to buyers.
EBITDA vs SDE for New York Small Businesses
If your company is relatively small and you are heavily involved in daily operations, SDE may be a more appropriate starting point.
If the company has developed independent management and can operate without the owner performing the primary operating role, EBITDA may provide a more useful measure of operating performance.
If you are unsure which approach fits your business, compare:
- Owner involvement
- Management structure
- Business size
- Employee responsibilities
- Revenue and profitability
- Buyer profile
- Transferability
The appropriate metric should reflect the actual economics of the business.
Prepare Your EBITDA Before You Sell
If you are considering selling a business in New York City, Long Island, Westchester County, Rockland County, the Hudson Valley, Northern New Jersey, or Southern Connecticut, it can be helpful to begin normalizing EBITDA well before the business goes to market.
Maintain:
- Several years of financial statements
- Tax returns
- Supporting records
- A list of potential adjustments
- Explanations for unusual expenses
- Owner compensation information
- Capital expenditure information
- Debt and working-capital information
This gives you a clearer picture of the company’s financial performance before you begin discussing value with buyers.
Estimate Your Business Value
Once you have calculated and reviewed your EBITDA, the Free Business Valuation Calculator can give you a starting point for estimating what your business may be worth.
If your company operates in New York City, Long Island, Westchester County, Rockland County, the Hudson Valley, Northern New Jersey, or Southern Connecticut, use the calculator as an initial estimate rather than a guaranteed selling price.
A more detailed valuation may require a review of normalized EBITDA, financial statements, adjustments, management structure, customer concentration, industry characteristics, debt, working capital, and other business-specific factors.
Calculate Your Business Value
Knowing your EBITDA is useful, but the next question is usually:
What does that EBITDA mean for the value of my business?
That’s where valuation becomes more than a simple formula.
Your business value can depend on EBITDA, SDE, revenue, assets, industry, growth, risk, customer concentration, owner involvement, and other factors.
You can use our free business valuation calculator to get an initial estimate based on your business information.
The calculator is intended as a starting point, not a formal appraisal or guarantee of what your business will sell for.
Frequently Asked Questions
The basic formula is:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Start with net income and add back interest expense, income taxes, depreciation, and amortization.
For example, $300,000 of net income plus $30,000 interest, $70,000 taxes, $40,000 depreciation, and $10,000 amortization produces $450,000 of EBITDA.
Adjusted EBITDA is EBITDA that has been further normalized for certain qualifying items that may not represent the company’s ongoing operating performance.
Not every unusual expense qualifies as an adjustment.
The basic EBITDA calculation adds back interest, taxes, depreciation, and amortization. Additional adjustments may be made when calculating adjusted EBITDA, but those adjustments should be reasonable, supportable, and relevant to the analysis.
No.
EBITDA is generally operating income before depreciation and amortization.
A simplified relationship is:
EBITDA = EBIT + Depreciation + Amortization
Use:
EBITDA Margin = EBITDA ÷ Revenue × 100
For example, $400,000 of EBITDA on $2 million of revenue produces a 20% EBITDA margin.
Yes. If operating expenses exceed revenue after considering the relevant calculation, EBITDA can be negative.
No.
SDE is generally designed to show the economic benefit available to an owner-operator, while EBITDA is an operating earnings measure that excludes interest, taxes, depreciation, and amortization.
A simplified approach is:
Enterprise Value = EBITDA × Valuation Multiple
The appropriate multiple varies based on the characteristics and risk of the business.
Not necessarily.
A higher EBITDA can support a higher valuation, but buyers also consider factors such as growth, recurring revenue, customer concentration, management, risk, owner dependence, and the quality and sustainability of earnings.
Related Business Valuation Resources
Continue learning with:
- Business Valuation: Learn how businesses are valued and what factors affect value.
- EBITDA Business Valuation: Understand how EBITDA is used to estimate business value.
- SDE vs. EBITDA: Compare the two earnings measures and determine which may be more appropriate.
- Business Valuation Methods: Explore the major approaches used to value a business.
- Business Valuation Multiples: Learn how valuation multiples work.
- How Much Is My Business Worth?: Explore the factors that determine what a business may be worth.
- Business Valuation Calculator: Get an initial estimate of your business value.
Final Takeaway
Calculating EBITDA is straightforward:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
The harder part is determining whether the resulting number accurately represents the company’s ongoing operating performance.
If you’re using EBITDA for business valuation, don’t stop at the formula. Review the underlying financial statements, look for legitimate normalization adjustments, consider several years of performance, and evaluate the quality and sustainability of the earnings.
Once you have a reasonable EBITDA figure, you can use it as one part of a broader business valuation analysis.
Ready to see what your business may be worth?