Valuation
EBITDA is a company's earnings before interest, taxes, depreciation and amortization. Buyers use it as a quick measure of operating cash earnings and as the base for setting a price.
EBITDA stands for earnings before interest, taxes, depreciation and amortization. It strips out financing choices, tax setups and accounting write-downs. What remains is a simple view of how much cash the operations earn.
For example, a services company has $20 million in revenue, pays $16 million in operating costs and has $4 million left. That $4 million is its EBITDA. Two companies with the same EBITDA look alike to a buyer, even if one carries more debt.
Owners should know their EBITDA because it drives price. Most lower middle market deals are priced as a multiple of it. Capstreet states its target size this way: "$3 to $15 million of EBITDA". A cleaner EBITDA, backed by good books, supports a stronger offer.
Read how buyers turn this number into a price in how private equity values a business. See also EBITDA multiple and adjusted EBITDA.
Related terms
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