What Is EBITDA—and Why Does It Matter in a Business Sale?

EBITDA In Business Valuation Explained

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It’s often used as a shorthand for a business’s operating performance, allowing potential buyers or investors to assess profitability before the impact of financing and accounting decisions.

In simple terms, EBITDA helps level the playing field by comparing businesses of different sizes or structures on a like-for-like basis. By removing factors like capital investment or tax structure, it shows how efficiently a company can generate earnings from its core operations.

Why EBITDA Matters in M&A

For business owners preparing for a potential sale, EBITDA is a crucial part of the valuation conversation. Many business valuations—especially in private equity or trade sale contexts—use a multiple of EBITDA to estimate enterprise value.

Benefits of using EBITDA:

• Comparable benchmark across industries and company sizes
• Focus on operational performance, not accounting policy
• Helps uncover growth potential unclouded by historical investment patterns

Investors or acquirers may apply an “EBITDA multiple” (e.g. 6x EBITDA) based on your sector’s norms, recent deals, and the perceived risk and growth of your business.

EBITDA Isn’t The Whole Picture

While useful, EBITDA has limitations—and savvy buyers know it. Critically, it doesn’t account for:

• Capital expenditure (CapEx): EBITDA ignores how much you need to reinvest in machinery or systems.
• Working capital needs: A high EBITDA is less helpful if it’s tied up in unpaid invoices or stockpiles.
• Debt or financing structure: Two businesses with the same EBITDA may carry very different financial risks.
• Tax risk: Deferred liabilities or tax exposures may impact post-sale returns.
• Intangible value: EBITDA tells you nothing about the strength of your brand, customer relationships, employee culture, or market positioning.

These intangible factors often influence post-sale success far more than pure numbers. For example, a buyer inheriting a business with low staff morale or poor brand loyalty may face serious challenges that weren’t visible in the headline figures.

“Valuation models rarely capture the full value of brand equity, but buyers quickly feel its absence when customer churn or employee turnover spikes post-deal.” Forbes Business Council, 2023

Intangible Value in Business Sales

Buyers increasingly value what can’t be seen on a balance sheet:

Tangible Value	Intangible Value
Equipment & physical assets	Brand reputation
Premises and stock	Customer loyalty & satisfaction
Contracts and licences	Leadership capability & team culture
Net profit and EBITDA	ESG performance & ethical credentials
Accounts receivable	Market positioning and perceived trust

These elements feed directly into price, risk, and integration strategy. Strong brand equity, clear governance, and high-trust cultures often support higher multiples or improved deal terms.

How to Use EBITDA Wisely as a Seller

EBITDA can be useful—but only when it’s framed in the right context. Consider:

1. Normalise EBITDA – Remove unusual costs (e.g. pandemic recovery support, one-off legal fees).
2. Document all adjustments – Create a reconciliation that builds trust with potential acquirers.
3. Support your narrative – Show how operational performance supports future growth.
4. Present alongside brand and culture metrics – Consider including employee Net Promoter Scores (eNPS), customer loyalty data, or brand strength indicators.

Beyond the Numbers—Reputation, Culture, and Brand Still Count

A high EBITDA might attract attention, but it won’t retain staff or protect customer relationships post-sale. Cultural alignment, leadership behaviour, stakeholder trust, and long-term reputation are frequently dealmakers—or dealbreakers.

As PwC’s M&A Integration Survey found, 71% of failed integrations cite cultural misalignment as the main cause.

Our advice: bring brand due diligence and stakeholder research into your M&A preparation early—not just as a bolt-on after the deal.

Glossary of Key Terms

Term	Definition
EBITDA	Earnings Before Interest, Taxes, Depreciation, and Amortisation – a measure of core operating profit.
Depreciation	Reduction in value of tangible assets (e.g. equipment) over time.
Amortisation	Spreading the cost of intangible assets (e.g. patents) over time.
Normalised EBITDA	EBITDA adjusted to remove one-off or non-recurring items.
CapEx	Capital Expenditure – spending on fixed assets like buildings or machinery.
Working Capital	Cash and assets used in day-to-day operations, minus liabilities.
Enterprise Value (EV)	Total value of a company, including debt and excluding cash.
EBITDA Multiple	Sector-based multiplier applied to EBITDA to estimate value.
Adjusted EBITDA	Another term for normalised EBITDA.
Brand Due Diligence	Assessment of brand reputation, trust, and alignment before acquisition.
Intangible Assets	Non-physical assets like brand, goodwill, intellectual property, or customer relationships.
Brand Equity	The value associated with brand perception, loyalty, and market trust.

Selling your business? Don’t rely on EBITDA alone—build a value story that includes people, brand, and culture.