EBITDA (earnings before interest, taxes, and depreciation)

• Measures how much a business earns from its day-to-day operations
• It is calculated before interest (the cost of debt), taxes, and depreciation (the accounting depreciation of equipment)
• Its English equivalent is EBITDA (earnings before interest, taxes, depreciation, and amortization)
• Widely used to estimate the value of a business for sale or purchase
• A “non-GAAP” measure: It supplements net income and cash flow, without replacing them

Let’s consider two auto repair shops that generate the same revenue from repairs: one has significant debt, the other does not. Their net profit will be very different, while their EBITDA will be similar, because it excludes the impact of debt and tax choices. That’s why buyers and bankers look at it: it shows the true strength of the business. In fact, a business is often sold at a multiple of its EBITDA (for example, 4 times EBITDA). Note: It says nothing about the actual cash on hand or the investments that need to be made. Bankeo connects you, for free, with a vetted accountant or CPA to calculate and properly interpret it, and we’ll be right by your side.

Here’s an example with numbers: A business that generates $150,000 in EBITDA and trades at a multiple of 4 is worth approximately $600,000, before adjustments. EBITDA is calculated as your revenue minus cost of goods sold and your operating expenses; it sheds light on the margin but is not a substitute for the cash flow, because it excludes cash actually received. It is a “non-GAAP” (non-Generally Accepted Accounting Principles) metric, the public disclosure of which is regulated by securities authorities (Source: Autorité des marchés financiers). Whether you’re planning to buy or sell, Bankeo will connect you, for free, with a vetted accountant who will calculate it accurately, and we’ll be there for you every step of the way.

What is EBITDA, in simple terms?

It’s the money generated by a business’s core business, before subtracting three items that vary greatly from one business to another: interest on loans, taxes, and depreciation (the accounting depreciation of equipment). This allows you to compare two businesses on the same basis.

Are BAIIA and EBITDA the same thing?

Yes. BAIIA is the French term (earnings before interest, taxes, and depreciation), and EBITDA is its English equivalent. Both measure exactly the same thing: operating profitability.

Is EBITDA the same as the profit I actually take home?

No. EBITDA excludes interest, taxes, depreciation, and amortization, as well as the funds that need to be reinvested: your actual net profit is lower. It’s a performance metric, not your account balance. Bankeo connects you with a vetted accountant or CPA, for free for entrepreneurs, to help put these numbers into context, and we’re here to support you every step of the way.