Buying a business
What is EBITDA and Why is it Relevant to You?
What EBITDA measures, why buyers price companies on it, what it leaves out, and how it affects you whether you are buying or selling.
By Michael D. Rubin, CEO & Founder · Updated September 2026 · 724 words
EBITDA stands for earnings before interest, taxes, depreciation and amortization, and it is the figure most buyers use to compare and price established private companies. It is relevant to you because the price of a lower-middle-market company is usually quoted as a multiple of it, so every dollar of EBITDA a buyer accepts or rejects moves the price by several dollars.
It is also easy to misuse. EBITDA measures operating earnings, not cash, and anyone buying or selling a company should know exactly what it leaves out.
What each part of EBITDA removes, and why
EBITDA starts from net profit and adds back four items. Each is set aside for a reason. What remains approximates what the operations earn before financing and accounting choices, which lets a buyer compare companies that are financed and structured differently.
- Interest depends on how the current owner financed the company. A buyer will finance it their own way, so the seller's interest cost is removed.
- Taxes depend on the entity type and the owner's personal situation, both of which change with a new owner.
- Depreciation spreads the cost of equipment and buildings over their useful life. It is an accounting charge, not a cash payment in the year it is recorded.
- Amortization does the same for intangible assets, such as goodwill from an earlier acquisition.
Adjusted EBITDA: the number the price is built on
Buyers and sellers rarely use raw EBITDA. They use adjusted EBITDA, which adds back expenses that will not continue under a new owner and deducts costs the new owner will face. Typical adjustments include an owner's above-market salary, personal expenses run through the company, a one-time legal bill, or rent paid to the owner that differs from market rent. Each needs evidence, and our guide to how add-backs affect value shows which ones buyers accept.
For a company in the $3 million to $100 million revenue range, buyers most often pay three to seven times adjusted EBITDA. Where a company lands in that range depends on its size, growth, customer concentration, how much it relies on its owner and the quality of its records. That is why the adjustments matter so much: each one is multiplied. A formal business valuation tests them the way a buyer would.
What EBITDA leaves out
EBITDA is popular because it turns a complicated question into a single number. That simplicity is also its weakness. It ignores several things that decide whether a business actually produces cash:
- Capital spending. A company that must replace trucks or machines every few years has real cash costs that depreciation only hints at.
- Working capital. A growing distributor may need more inventory and receivables every year, which absorbs cash that EBITDA counts as earned.
- Debt service. A buyer's loan payments come out of cash flow, not out of EBITDA.
- Taxes. Someone pays them, and the structure of the deal affects how much.
- Quality and risk. Two companies with identical EBITDA can be worth very different amounts if one depends on a single customer or on its owner.
Why it matters whether you are buying or selling
If you are buying, never treat EBITDA as the money available to you. Start from it, subtract capital spending, the change in working capital, taxes and your loan payments, and see what remains. Lenders run a version of that calculation before approving acquisition debt, as our page on business financing explains.
If you are selling, clean, well-supported adjusted EBITDA is your most valuable document. Expenses mixed with personal spending, adjustments you cannot prove, or books that do not reconcile with tax returns all give a buyer a reason to lower the number, and the price with it. Smaller owner-run companies are often valued on SDE (seller's discretionary earnings) instead; our comparison of EBITDA, SDE and revenue methods explains when each is used.
How MDR & Associates uses EBITDA
MDR & Associates prepares a financial recast for every company it takes to market, rebuilding adjusted EBITDA from three years of statements and tax returns and documenting each adjustment so buyers can verify it rather than argue about it. That recast is the foundation of the confidential marketing package and of the competing letters of intent we negotiate. If you want to see how your own earnings would read to a buyer, contact the firm for a confidential conversation.
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Questions owners ask next
Is EBITDA the same as cash flow?
No. EBITDA ignores spending on equipment, changes in inventory and receivables, taxes and loan payments, all of which use real cash. It is a useful measure of operating earnings for comparing companies, but a buyer or lender works out actual cash flow separately before deciding what a company can support.
Can a company with negative EBITDA be sold?
Sometimes, but not on an earnings multiple. A buyer would value it on its assets, customers, technology or fit with their own business, and the pool of interested buyers is much smaller. Most sell-side advisors, including MDR & Associates, focus on profitable companies.