What is EBITDA? More importantly, what is your EBITDA?

We’ve touched on the importance of accurate financial statements in past posts, and want to highlight EBITDA, a financial component that buyers usually analyze when assessing the potential value of a business.

What Is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization and is an indicator of financial performance and pre-tax operational cash flow. A potential buyer will use EBITDA and EBITDA margin to assess a valuation range for a business.

EBITDA and buy-in are also terms that owners compare when determining value. While EBITDA measures a company’s core operating profit, a “buy-in” refers to an incoming partner or investor purchasing a stake in a business. When structuring a buy-in price, parties frequently multiply the company’s EBITDA by an industry-standard factor to set the valuation.

Some may be considering whether EBITDA or market cap should be assessed for a sale. The short answer: Market cap and EBITDA measure two completely different things. Market cap is the total dollar value of a company’s stock, while EBITDA is a measure of a company’s core operating profit before accounting for financing, taxes, and non-cash expenses. You use them together (as EV/EBITDA) rather than choosing one over the other.

Additionally, when discussing net owners comp vs. EBITDA, the primary difference lies in how owner labor and expenses are treated. Net owner’s compensation (often tied to Seller’s Discretionary Earnings, or SDE) adds back one owner’s total compensation and perks to show total cash flow for an owner-operator. EBITDA subtracts a market-rate salary for running the business, treating the owner like an employed manager.

How Do You Calculate EBITDA?

EBITDA is calculated as follows:

Net Income

+ Interest Expense

+ Income Tax Expense

+ Depreciation Expense

+ Amortization Expense

= EBITDA

By adding back the various elements listed above, an owner is able to provide a more objective view of the cash flows of a business. Companies often have different debt and corporate structures that affect interest paid and income tax reported on an income statement, as well as fixed and intangible assets with different depreciation and amortization schedules.

What Is Adjusted EBITDA and Why Is It Important?

In a previous blog post, we discussed addbacks. When selling a business, we will adjust EBITDA for one-time, extraordinary expenses or owner-related expenses. This allows buyers to analyze a company as if it were owned by a third party and how the business may perform with a new owner.

A regulatory note on “adjusted” figures: If your business is at a size where a buyer might be a public company, or you’re benchmarking against public comparables, it’s worth knowing that adjusted EBITDA is legally a “non-GAAP financial measure” once it leaves an internal spreadsheet and enters a public filing or investor communication. The SEC requires that any adjusted EBITDA figure be reconciled to the nearest GAAP measure (typically net income) and be presented no more prominently than that GAAP figure, under Regulation G and Item 10(e) of Regulation S-K. The SEC has continued to issue comment letters and enforcement actions on companies that present adjusted EBITDA in a misleading way — for example, by excluding recurring cash expenses or by not showing the GAAP reconciliation clearly.

This mostly matters for larger or growth-stage sellers, but it’s a good discipline for any size business: keep your addbacks well-documented and defensible, because a sophisticated buyer’s diligence team will scrutinize them the same way regulators scrutinize public companies’ adjustments.

Is EBITDA the Only Thing a Buyer Uses to Assess the Value of the Business?

When assessing the value of a business, adjusted EBITDA is the starting point. Buyers will often review industry dynamics, cyclicality, customer concentration, management dynamics, and other aspects of the business to come up with value.

What EBITDA Multiples Actually Look Like Right Now (2026)

Since multiples move with the deal environment, here’s where things stand as of mid-2026:

  • Main Street / small business deals (under $2M in earnings) are trading on seller’s discretionary earnings (SDE) rather than EBITDA, with recent closed-transaction medians running roughly 2.0x SDE for deals under $500K, climbing to about 3.0x SDE in the $1M–$2M range, based on the IBBA/M&A Source Market Pulse Survey for Q1 2026.
  • Lower middle market deals ($2M–$50M in EBITDA) are landing around 4.0x EBITDA at the smaller end of that band per the same survey, while broader lower-middle-market industry guides put the general range at 3x to 9x depending on sector, with home services around 4–6x, healthcare services 5–9x, and vertical SaaS as high as 8–15x.
  • PE-sponsored middle market deals ($10M–$500M enterprise value) averaged roughly 7.2x–7.5x EBITDA in 2025 according to GF Data, while Capstone Partners’ broader tracking of all middle-market deal types put valuations closer to 9.2x–9.4x.
  • Recurring revenue and growth still command a real premium. Multiple sources note that businesses with contracted or subscription-style revenue can trade 1.5x–2.0x higher than project-based peers with similar earnings, and companies growing EBITDA in the double digits can command 1.0x–2.0x more than flat or declining competitors.
  • Customer concentration remains a major discount driver. When one customer accounts for more than 20% of revenue, valuations can drop 20–40% below industry medians, and heavy concentration among the top three customers can make a business difficult to sell without seller financing or an earnout to bridge the risk.

The takeaway hasn’t changed, just the numbers: your multiple is never a single industry average; it’s a range that reflects your size, growth, revenue quality, and customer base.

With your EBITDA in hand, you’ll know exactly where your business stands in terms of industry competition, what kind of multiple you can negotiate for (it will be smaller for companies with a smaller EBITDA and larger for higher ones), as well as whether there are factors that need improvement before you take steps towards selling. Whether you’re hoping to put your company on the market now or far into the future, EBITDA is something every business owner should be familiar with inside and out.