Encyclopedia
EBITDA
Earnings before interest, taxes, depreciation and amortization, often used to value larger businesses.
For example: A buyer of a mid-size company compares asking price with adjusted EBITDA and asks which adjustments the seller made. (Illustration only, not a real deal.)
This is a general industry term with no single official definition. Your lease or contract wording controls.
Example only, not a real client. Say you are buying a business that occupies a building. You look at its earnings before interest, taxes, depreciation and amortization to see how much cash the operation generates, and whether it can cover rent or a mortgage comfortably.
What I’d tell a friend
EBITDA is a useful snapshot of operating earnings, but it is not cash flow. Look at capital spending and debt too.
Why it matters to you
Businesses are often priced as a multiple of it, so every adjustment moves the price. Buyers will test each one.
How to use it in your deal
Sellers should prepare clean financial statements with clear add-backs, and be ready to prove each one. If the business owns its building, show EBITDA after a market rent, so buyers see what the business earns if the property is separate. Buyers should check EBITDA against tax returns and bank statements, and look at capital spending the business needs, since EBITDA ignores it.
Lenders often look at EBITDA to size business loans, and may set covenants based on it. Owners planning a sale in a few years should start cleaning up the books now.
Mistakes I see
Treating EBITDA as cash flow. Ignoring capital spending and working capital. Accepting generous add-backs without proof. Forgetting that a business paying no rent to its owner-landlord shows an inflated EBITDA.
In BC and Vancouver
No BC rule defines EBITDA; it's a non-standard measure. Tax treatment follows federal rules, so get accounting advice.
The Canada Revenue Agency (CRA) handles federal tax. Official sources: Income Tax Act (Justice Laws) · CRA Guide T4037: Capital gains
What it is
EBITDA stands for earnings before interest, taxes, depreciation and amortization. It is a common measure of a business’s operating profit.
Buyers and lenders use it to compare businesses and estimate value.
Its limits
It leaves out capital spending, working capital needs and taxes.
Ask your accountant to review adjusted figures and how they were calculated.
Questions to ask before you sign
- What add-backs are included?
- Is EBITDA shown after market rent?
- What capital spending does the business need?
- Do the tax returns support it?
- How is the business valued separately from the real estate?
Keep reading
Related terms: Seller's discretionary earnings (SDE), Goodwill
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General information for British Columbia only. It isn’t legal, tax, accounting or financial advice, laws and rates change, and reading it doesn’t make you my client. Any numbers or scenarios are hypothetical. Check the linked official source and talk to a lawyer, accountant or other qualified professional before you act or sign anything. See the terms and disclaimer.