EBITDA
EBITDA — earnings before interest, tax, depreciation and amortisation — is a company's operating profit with the financing decisions, the tax regime and the accounting allocations for past investment added back, so that businesses with different capital structures, tax positions and asset bases can be compared on operating performance; it is the number most private-company acquisitions are priced on, as a multiple. It is not cash flow: it ignores capital expenditure, working capital and debt service.
- Also known as
- Earnings before interest, tax, depreciation and amortisation, Adjusted EBITDA, EBITDA margin, Operating earnings
- Used at
- deal pricing (enterprise value as a multiple of EBITDA), debt covenants (leverage as net debt to EBITDA), management incentives, and comparisons across companies and time; in fintech, the metric that a company reaches profitability on and is sold on
- Binding
- not a defined term under IFRS or US GAAP, so every EBITDA is a company's own definition; the SEC regulates its presentation by US-listed companies as a non-GAAP measure; loan agreements define it in detail because covenants depend on it
- Typical calculation
- operating profit plus depreciation and amortisation; or net income plus interest, tax, depreciation and amortisation; then adjustments — one-off costs, non-cash items, owner's compensation above market, discontinued lines — to arrive at adjusted EBITDA, the figure in the information memorandum and the figure the buyer's accountants rebuild
- Typical multiples
- private fintech and payments businesses at 8–15× EBITDA in 2024–2025 depending on growth and quality; software higher; lending and lower-growth services lower; public comparables set the range and the deal's specifics move within it
- Parties
- the seller who presents it, the buyer who tests it, the accountants who report on its quality, the lenders whose covenants reference it, and the management whose bonuses depend on it
How EBITDA works in practice
A payments company reports revenue of €40 million and operating profit of €5 million. Add back depreciation of €1.5 million and amortisation of €1 million: EBITDA €7.5 million. The seller's adjustments: €0.8 million of one-off legal costs, €0.4 million of a founder's above-market salary, €0.6 million of costs of a discontinued product — adjusted EBITDA €9.3 million. At the sector's 11× multiple that is an enterprise value of €102 million; on the unadjusted €7.5 million, €82 million. The €20 million between them is the negotiation, and quality-of-earnings diligence is where it is fought: were the legal costs one-off, or does the company have one every year? Is the salary add-back matched by a replacement's cost? Did the discontinued product's revenue leave with its costs?
EBITDA's uses come with the misreadings. It excludes capital expenditure, so a company that must reinvest heavily to stand still — a platform with a rebuild ahead — looks better on EBITDA than on cash flow. It excludes working-capital movements, so a growing business absorbing cash into receivables shows EBITDA and no cash. For a licensed fintech it says nothing about capital requirements or safeguarding, which the business must fund regardless. And "adjusted" carries no limit; the market's shorthand "EBITDA before the bad stuff" is a warning. The buyer's discipline is to price on the EBITDA its own accountants accept, to check it against free cash flow, and to structure any gap into an earn-out or a price adjustment.
For a fintech founder, EBITDA is the number the sale is priced on and worth building deliberately — clean accounting, defensible adjustments, a bridge to cash — for years before the process; for a buyer, it is a starting point that the cash flow statement corrects.
Example
A seller presents adjusted EBITDA of €9.3 million on the case above. The buyer's quality-of-earnings review accepts the salary add-back (a CEO at market cost is €0.35 million, so €0.4 million becomes €0.05 million), rejects half the legal add-back (the company has had disputes every year; €0.4 million is recurring), and accepts the discontinued line. It also finds €1.2 million of development cost capitalised and amortised that is in substance ongoing maintenance. Adjusted EBITDA on the buyer's basis: €7.65 million. The buyer also reads the cash flow: capital expenditure of €2.5 million a year and working capital absorbing €1 million, so free cash flow is about €3.5 million against EBITDA of €7.65 million. Price: 11× the buyer's EBITDA, €84 million, with €6 million of it deferred against the next year's actual EBITDA.
Common mistakes
- Pricing on the seller's adjusted EBITDA without a quality-of-earnings rebuild. - Reading EBITDA as cash; it ignores capex, working capital and debt service. - Add-backs for costs that recur under another name. - Capitalised development treated as investment when it is maintenance. - Comparing multiples across companies whose EBITDA definitions differ.