What EBITDA actually measures
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. In plain terms, it strips financing decisions (interest), tax situations, and non-cash accounting charges (depreciation and amortization) out of net income to approximate the core operating profitability of the business.
Buyers gravitate to EBITDA because it lets them compare companies on an apples-to-apples basis regardless of how each is financed or how aggressively it depreciates its assets. It is the closest single number to “how much cash does this business throw off from operations.”
Why it drives your valuation
Most lower-middle-market businesses are valued on a multiple of EBITDA — for example, a business with $4M of EBITDA and a 6x multiple implies a $24M enterprise value. That means two levers move your price: the EBITDA number itself, and the multiple a buyer is willing to pay for it.
Adjusted EBITDA and add-backs
Owners rarely run their business to maximize reported profit. Personal expenses, above-market owner compensation, one-time legal costs, or non-recurring items often sit in the P&L. Adjusted EBITDA normalizes for these through add-backs, presenting the true earning power a new owner would inherit.
Add-backs are also where deals are won and lost. Legitimate, well-documented adjustments increase value; aggressive or unsupported ones erode buyer trust. Preparing a clean, defensible quality-of-earnings view before going to market is one of the highest-return things a seller can do.