Value a Business

What Is EBITDA? A Business Owner’s Guide

TL;DR: EBITDA is earnings before interest, taxes, depreciation, and amortization: the standard shorthand for what a business generates before financing choices, tax structure, and non-cash charges. It is the pricing metric for lower-middle-market deals, which the IBBA and M&A Source Market Pulse reported at a median 4.0 times EBITDA in the first quarter of 2026. It is also the most abused number in small-business finance. Warren Buffett wrote that references to EBITDA make him shudder. Both things are true: buyers price on it, and buyers distrust it. The version that survives is adjusted EBITDA with every adjustment documented.

Somewhere in your first conversation about selling, someone will quote you a multiple “of EBITDA,” and the entire value of your life’s work will suddenly hang on a five-letter acronym. So what is it, exactly? In fifteen years of valuing and selling businesses across the Gulf South, I have found most owners can recite the acronym and very few can defend the number, which is a problem, because defending the number is where the money is.

Key Takeaways

EBITDA is earnings before interest, income taxes, depreciation, and amortization, per the IBBA glossary definition.

It is the lower-middle-market pricing metric: Q1 2026 Market Pulse medians ran 4.0 times EBITDA for deals from $2 million to $5 million.

Adjusted EBITDA replaces owner compensation with a market-rate manager and strips non-recurring items; the adjustments are where deals are won and lost.

Treat it as a comparison tool, not cash flow. It ignores capital expenditures, working capital, and debt service, which is exactly what its critics attack.

What is EBITDA, exactly?

The International Business Brokers Association glossary defines EBITDA as “earnings of a business prior to interest (expense or income), income taxes, depreciation and amortization expenses.” Start with operating profit and add back the four items in the acronym. That is the whole formula.

Why strip those four? Because each reflects a choice or a convention rather than operating performance. Interest reflects how the current owner financed the company; a buyer will finance it differently. Taxes reflect entity structure. Depreciation and amortization are accounting allocations of money spent in earlier years. Remove all four and you get a rough proxy for the operating engine itself, which is why buyers use it to compare businesses with different structures on one scale.

Citation capsule: EBITDA, defined by the IBBA glossary as earnings before interest, income taxes, depreciation, and amortization, is the standard pricing metric for lower-middle-market business sales. The IBBA and M&A Source Market Pulse reported median multiples of 4.0 times EBITDA for transactions between $2 million and $5 million in the first quarter of 2026.

EBITDA or SDE: which one applies to your business?

Purchase price decides it. The Market Pulse convention quotes deals under $2 million on seller’s discretionary earnings and deals from $2 million to $50 million on EBITDA. The difference is one assumption: SDE adds back a working owner’s entire compensation because an owner-operator buyer will replace you personally. EBITDA does not, because larger buyers hire management, so a market-rate salary for someone to run the company stays in the expense base.

That single assumption is why the two metrics produce very different numbers for the same business, and why multiples on them are never comparable. A business showing $600,000 of SDE might show $450,000 of EBITDA after charging a real manager’s salary. Quote the wrong metric with the wrong multiple and you can miss the value by a third. Our guide to Main Street versus lower middle market valuation covers the boundary in detail.

What is adjusted EBITDA, and why do buyers insist on it?

Raw EBITDA off your P&L is almost never the number a deal prices on. The IBBA glossary separately defines adjusted EBITDA: earnings before the same four items, also excluding non-operating and non-recurring income and expenses, and with the owner’s compensation replaced by the market-rate cost of the function the owner performs. In practice, that means the same recasting discipline that builds SDE: documenting every personal expense, one-time event, and off-market arrangement, then normalizing them.

Every adjustment will be tested. A buyer’s quality-of-earnings team exists precisely to rebuild adjusted EBITDA from source documents, and each add-back that fails costs its amount times the multiple. The rules of evidence are simple: general ledger tie-outs, invoices, payroll records. If the paper trail does not exist, the adjustment does not either. We walk that discipline in what QoE analysts find in your books.

Why do serious investors distrust EBITDA?

Because it is not cash flow, and pretending it is has burned generations of buyers. In his 2000 shareholder letter, Warren Buffett wrote that “references to EBITDA make us shudder,” asking whether management thinks “the tooth fairy pays for capital expenditures.” Charlie Munger, at the 2003 Berkshire Hathaway annual meeting, suggested substituting a much cruder phrase every time you read the word. Their point is mechanical, not rhetorical: EBITDA ignores the real cash a business must spend on equipment, vehicles, and working capital just to stay in place.

Regulators worry about it too. Because EBITDA is a non-GAAP measure, SEC Regulation G requires public companies that cite it to reconcile it to the nearest GAAP figure and prohibits presentations that mislead. Private sellers face no Reg G, but they face something stricter: a buyer’s lender running debt-service math on real cash flow. A capital-intensive business with strong EBITDA and relentless equipment replacement will be priced on what is left after the fleet is funded, whatever the acronym says.

Our finding: In our Gulf South engagements, the buyers who pay the best prices are rarely fooled by a big EBITDA number, and the sellers who get the best prices never rely on one. The winning combination we see is modest, bulletproof adjustments plus an honest capital-expenditure story. Credibility compounds across a deal; cleverness does not.

The SBA appraiser who asked for proof, and got it to the penny

A story from our practice, details withheld to protect confidentiality. We prepared the financials for a service business here in the Gulf South that was selling to a buyer using an SBA loan. The books were fairly complicated, and the bank hired an independent appraiser to confirm the business was worth enough to support the loan.

The appraiser kicked our package back almost immediately. They needed to substantiate the numbers, and one of the representations they wanted proven was our conversion of seller’s discretionary earnings to EBITDA. That is exactly where a deal can stall: if the bridge from SDE to EBITDA cannot be traced line by line, the appraiser has to discount it, and a lower appraisal can sink the financing.

We were ready for it because of how we build every set of numbers. We have the seller, or their CFO, convert everything directly off the general ledger, not off summary statements or memory. So we built a data room around the appraiser’s requests and submitted a large one, substantiating every line item of the EBITDA representation to the penny.

We never heard back from the appraiser. Two days later the bank told us the valuation came in high enough to cover the transaction, and the loan was approved. That is what a defensible EBITDA looks like: not a number you argue for, but a number nobody needs to argue about.

How should an owner actually use EBITDA?

Three ways, each with a guardrail:

As a market yardstick. Multiples of EBITDA are how the lower middle market communicates. Know your adjusted number and the current medians; our breakdown of what businesses actually sold for keeps the tables current.
As a management tool. Tracking adjusted EBITDA year over year measures the operating engine without the noise of financing and tax decisions. It is the growth number a future buyer will graph.
Never as cash flow. Budget from cash. A business that must spend heavily on equipment or carry heavy receivables can post proud EBITDA and starve. Buyers know this, and their lenders price it.

Is your number market-ready today? A formal valuation answers that with evidence; our complete owner’s guide to business valuation shows how EBITDA feeds the approaches, and the 10-minute self-assessment is the fast first look.

EBITDA FAQ

What does EBITDA stand for?

Earnings before interest, taxes, depreciation, and amortization. The IBBA glossary defines it as earnings of a business prior to interest expense or income, income taxes, and depreciation and amortization expenses. It approximates operating performance independent of how the business is financed, structured for tax, and depreciated for accounting.

What is a good EBITDA multiple in 2026?

The IBBA and M&A Source Market Pulse reported median multiples of 4.0 times EBITDA for lower-middle-market deals from $2 million to $5 million in Q1 2026. Individual businesses trade above or below the median based on growth, transferability, customer concentration, and the quality of their documented adjustments.

What is the difference between EBITDA and adjusted EBITDA?

Adjusted EBITDA additionally removes non-operating and non-recurring items and replaces the owner’s compensation with the market-rate cost of replacing the owner’s function, per the IBBA glossary. Deals price on the adjusted figure, and every adjustment must survive a buyer’s quality-of-earnings review with documentation.

Why did Warren Buffett criticize EBITDA?

In his 2000 Berkshire Hathaway shareholder letter, Buffett wrote that references to EBITDA make him shudder, asking whether management thinks “the tooth fairy pays for capital expenditures.” His objection is that EBITDA ignores real cash the business must spend on equipment and working capital, so treating it as cash flow overstates what an owner can actually keep.

Is EBITDA the same as cash flow or profit?

No. EBITDA excludes capital expenditures, working capital changes, debt service, and taxes, all of which consume real cash. It also is not net profit, which those items reduce. EBITDA is a comparison metric for pricing and benchmarking; budgeting and lending decisions run on actual cash flow.

Conclusion: know your number before someone quotes it to you

EBITDA is the language your sale will be negotiated in, and fluency pays. Know your adjusted number, know what each adjustment rests on, and know what the acronym hides about your capital needs. The owners who walk into a negotiation with that fluency set the anchor. The ones who do not, respond to someone else’s.

If you want your adjusted EBITDA built the way a buyer’s lender will test it, that is the first work of every engagement we take. Book a free consultation and we will walk through your P&L together.

Joel F. Duran has 15+ years of M&A and business brokerage experience and holds the CM&AA, M&AMI, CM&AP, CEPA, CVGA, CVB, CAIM, and CMSBB designations. Duran Advisors serves upper Main Street and lower middle market businesses across the Gulf South, including New Orleans Metro, the North Shore, Baton Rouge, Houma-Thibodaux, and South Mississippi. The client story in this article is a composite drawn from real engagements, with details changed to protect confidentiality.

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Sources

International Business Brokers Association, Glossary of Terms Used by Business Brokers and Advisors: definitions of EBITDA and adjusted EBITDA.
IBBA & M&A Source, Market Pulse Survey, Q1 2026 (56th edition, published May 2026): median EBITDA multiples by deal size and the SDE-to-EBITDA convention at $2 million in purchase price.
Berkshire Hathaway, 2000 Chairman’s Letter (February 2001): Warren Buffett on EBITDA and capital expenditures; Charlie Munger’s remarks at the 2003 Berkshire Hathaway annual meeting.
U.S. Securities and Exchange Commission, Regulation G, 17 CFR Part 244: reconciliation requirements for non-GAAP financial measures.