EBITDA calculator

EBITDA — the number acquirers and lenders use to value businesses

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is ubiquitous in business finance despite being technically a non-GAAP metric. It's the starting point for nearly every acquisition valuation, bank credit analysis, and private equity underwriting model. Understanding it — including its limitations — is essential for any business owner or executive navigating M&A, financing, or investor conversations.

Warren Buffett's famous criticism — and why EBITDA persists anyway

Buffett famously calls EBITDA "earnings before bad stuff" — pointing out that depreciation is a real economic cost (equipment wears out and must be replaced) and that removing it inflates the apparent profitability of capital-intensive businesses. He's right. A railroad or a pipeline company with enormous PP&E has large D&A that represents very real replacement capex requirements. Using EBITDA multiples for capital-intensive businesses without adjusting for capex overstates their value.

Despite this valid criticism, EBITDA persists because it solves a real problem in business comparisons: two companies in the same industry can show very different earnings because of different depreciation schedules (accelerated vs straight-line), different capital structures (debt vs equity financed), and different tax situations (carried losses from prior years, different jurisdictions). EBITDA removes all three sources of artificial difference — leaving a cleaner view of operational cash generation.

How EBITDA builds up from the P&L

The build-up:

• Revenue
• − COGS = Gross profit
• − Operating expenses (excluding D&A) = EBIT (operating income)
• + Depreciation + Amortization = EBITDA

Alternatively from net income: Net income + Interest + Taxes + Depreciation + Amortization = EBITDA.

How private equity uses EBITDA multiples

PE acquisition math: Entry EV = Entry Multiple × LTM EBITDA. If a business earns $3M EBITDA and the buyer pays 6×, the enterprise value is $18M. If the company has $2M of debt, equity purchase price = $18M − $2M = $16M.

After a 5-year hold, if EBITDA has grown to $5M and the exit multiple is also 6× (same as entry), exit EV = $30M. Debt has been paid down to $500k. Equity proceeds = $29.5M vs $16M invested — a 1.84× MOIC on equity. If EBITDA grows and the multiple expands (from 6× to 8× due to improved quality of earnings), returns are dramatically higher. This is the "double play" in PE: grow EBITDA and expand the exit multiple simultaneously.

EBITDA multiples by industry (2024 benchmarks)

• SaaS / software: 5–15× EBITDA at scale. High-growth unprofitable SaaS trades on ARR multiples (1–5× ARR) instead. Profitable SaaS at 30%+ EBITDA margin can trade 12–20×.
• Manufacturing: 5–8× for diversified industrial; 4–6× for commodity manufacturing.
• Business services: 6–10× for recurring-revenue service businesses; 4–6× for project-based.
• Distribution: 5–7×. Asset-intensive with thin margins; capex drag is real.
• Healthcare services: 7–12× for differentiated; 5–8× for commoditized.

Adjusted EBITDA — where it gets interesting (and dangerous)

In M&A, sellers present "Adjusted EBITDA" — EBITDA plus add-backs for items the seller claims are non-recurring. Common legitimate add-backs: one-time legal settlement, acquisition costs, CEO transition costs. Common red flags: stock-based compensation added back every year ("we grant options, but they're non-cash"), marketing investments characterized as non-recurring that have recurred for 3 years, and owner compensation above market rate added back as if the buyer won't need to hire a replacement.

Quality of earnings (QoE) diligence exists specifically to challenge adjusted EBITDA claims. Buyers hire accounting firms to reconstruct the true economic EBITDA from the seller's adjustments. Discrepancies of 20–40% between seller-presented Adjusted EBITDA and QoE-confirmed EBITDA are not rare.