How do you calculate EBITDA?
SHORT ANSWER
Start with net income, then add back interest, income taxes, depreciation and amortization.
| Example | |
|---|---|
| Net income | $400,000 |
| Add: interest | $30,000 |
| Add: income taxes | $60,000 |
| Add: depreciation and amortization | $110,000 |
| EBITDA | $600,000 |
Why do buyers use EBITDA?
SHORT ANSWER
It lets buyers compare businesses on the same footing. Two companies can earn the same from operations but show different net income because one has more debt or older equipment. EBITDA strips those differences out.
Most Canadian mid-market businesses are priced as a multiple of EBITDA. If buyers pay 4x and your EBITDA is $600,000, the starting point is a $2.4 million enterprise value.
What is normalized (or adjusted) EBITDA?
SHORT ANSWER
Normalized EBITDA is EBITDA adjusted to show what the business would earn under a new owner. It removes one-time costs, personal expenses run through the company, and sets the owner's pay at a market rate.
This is the number buyers actually price. The adjustments are called add-backs, and every one needs evidence behind it.
What EBITDA doesn't show
EBITDA ignores the cash you'll need to replace equipment, and it doesn't show how much working capital the business ties up. Good buyers look at both. A business with high EBITDA but old equipment will get a lower offer.