Finance
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization — a proxy for operating cash generation.
EBITDA strips out financing decisions (interest), tax structure (taxes), and accounting estimates (D&A) to focus on the operating profitability of a business. Often used as a valuation multiple for M&A.
Adjusted EBITDA further normalizes for one-time items (legal settlements, owner-related expenses, transition costs) to reflect the business's run-rate profitability.
Common pitfalls
- Using EBITDA as a proxy for cash flow without accounting for working capital changes and capex
- Buyers often discount aggressive 'add-backs' in seller-prepared adjusted EBITDA
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