Glossary
EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization
A normalized earnings measure used for larger, manager-run businesses — typically those above ~$1M in earnings.
What it is
EBITDA = Net profit + Interest expense + Taxes + Depreciation + Amortization.
The logic: EBITDA isolates operating performance from financing decisions (interest), tax jurisdiction (taxes), and capital investment timing (depreciation / amortization). 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 ~$1M in earnings, businesses are typically valued on SDE instead — the owner's compensation is treated as part of the cash flow available to a new owner-operator.
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's why SDE multiples (typically 2–4×) are lower than EBITDA multiples (typically 3–7×) for comparable-quality businesses — they're measuring different things.
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.
Where to go next
Looking at a target's EBITDA?
A free 20-minute call with Jason can flag whether the EBITDA will survive a SBA lender's review and what the capex-adjusted number actually looks like.
Book a free call