What Is EBITDA?

EBITDA, Defined

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a measure of a business's core operating profitability, stripping out financing decisions (interest), tax situations, and non-cash accounting charges (depreciation and amortization) to show what the business earns from operations. EBITDA is the standard metric for valuing larger businesses — generally those earning $1 million or more — and the businesses most attractive to private-equity and larger buyers.

How EBITDA Is Calculated

The build-up is straightforward:

• Start with net income
• Add back interest — financing is specific to each owner
• Add back taxes — tax situations vary
• Add back depreciation and amortization — non-cash charges

The result is earnings from core operations, comparable across businesses regardless of how they're financed or taxed. That comparability is exactly why buyers and investors favor it for larger companies.

The Key Difference From SDE

The crucial distinction: EBITDA does not add back the owner's compensation, while SDE does. That's because a larger business is expected to run with paid professional management, not a single working owner — so the manager's salary is a real, ongoing cost that stays in the numbers. A small owner-operated business uses SDE; a larger, management-run business uses EBITDA. See SDE vs. EBITDA explained for a full comparison.

EBITDA Multiples

Larger businesses sell for a multiple of EBITDA, typically higher than small-business SDE multiples because larger, management-run businesses carry less risk. Mid-market businesses often trade at 3x to 7x EBITDA (and higher for strong, larger companies), depending on industry, size, growth, and customer diversification. The bigger and more professionally run the business, generally the higher the multiple.

Adjusted EBITDA

In practice, buyers often work with Adjusted EBITDA — EBITDA further adjusted for one-time, non-recurring, or owner-discretionary items to reflect the business's true ongoing earning power. This normalization gives a cleaner picture of sustainable profitability. As with SDE, every adjustment must be legitimate and survives buyer scrutiny in due diligence.

Frequently Asked Questions

Martin Navarro · Business Broker & M&A Advisor

Martin Navarro advises business owners across Los Angeles, Ventura, and Southern California on selling, buying, and valuing privately held companies. A U.S. Marine Corps veteran with dual CSUN degrees in Business Management and Accounting, he brings hands-on transaction experience and a straight-talking, numbers-first approach to every engagement. Bilingual in English and Spanish.