EBITDA

EBITDA takes net profit and adds back interest, income taxes, depreciation and amortisation. The idea is to show the operating earnings of the business before the effects of how it is financed, how it is taxed and how its assets are written down. It is not cash flow, because it ignores working capital movements and capital spending, but it is the common language of lenders and buyers.

In British Columbia, a bank sizing a loan will look at EBITDA against debt service, and a buyer will value most companies as a multiple of normalised EBITDA. Normalised means adjusted for things that will not continue under new ownership, such as owner compensation above or below market, personal expenses in the business and one-time costs. The adjustments need evidence or they are discounted. For smaller owner-operated companies, seller's discretionary earnings, which adds back one owner's full compensation, is used instead.

In practice, we report EBITDA monthly alongside cash so that the owner sees both the operating result and what it turned into, track the covenant version of it the way the loan agreement defines it, and build the normalised schedule with the CPA well before a sale. BizSell.ca, Ali's brokerage, values companies on normalised EBITDA and SDE using three methods.