EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization

What it is

EBITDA = Net profit + Interest expense + Taxes + Depreciation + Amortization.

The logic is subtraction. Strip out how the business is financed (interest), where it is taxed (taxes) and when it last bought equipment (depreciation and amortisation), and what is left is the operating performance. This makes it useful for comparing businesses across capital structures and tax regimes — and for valuing businesses where the owner's compensation is a real operating expense (because the business has a manager in place).

When to use it

• The business has a manager in place (or could have one).
• The owner's compensation is a real operating expense, not a distribution of profit.
• The business's earnings are roughly above ~$1M per year.

Below roughly $1M of earnings the market values on SDE instead. The reason is simple: at that size the owner works in the business, so their pay is part of the cash a new owner-operator actually gets.

EBITDA vs SDE — the key difference

SDE includes the owner's compensation. EBITDA does not. So for the same business, SDE will always be larger than EBITDA. That is why an SDE multiple is a smaller number than an EBITDA multiple on the same business: SDE is the larger earnings figure, because it adds the owner’s compensation back in. Comparing a multiple quoted on one basis to a multiple quoted on the other is the single most common valuation error in small-business acquisitions. Always ask multiple of what before you compare anything.

What EBITDA doesn't capture

• Capex. EBITDA adds back depreciation but ignores the actual cash cost of replacing equipment. For capex-intensive businesses (hotels, car washes, dry cleaners, restaurants), EBITDA overstates real cash flow.
• Working capital changes. EBITDA doesn't account for changes in accounts receivable, inventory, or accounts payable. A growing business can show strong EBITDA but consume cash through working capital.
• Tax. EBITDA adds back tax — but the buyer will pay tax. Real free cash flow is below EBITDA.

New York-specific notes

• NYS corporation tax and NYC Business Corporation Tax are real cash expenses below EBITDA — model them in your pro-forma.
• For NYC businesses, NYC Commercial Rent Tax (where applicable) is a real operating expense below EBITDA.
• NYS labor costs (workers' comp, statutory disability, PFL, UI) are operating expenses that reduce EBITDA — verify they're properly expensed in the seller's numbers.