Definition
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It strips out financing decisions, tax strategies, and accounting methods to show how profitable your core business operations are.
Formula: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Why It Matters
EBITDA is the most common metric used to value businesses, especially in M&A and fundraising. Investors use it because it normalizes for differences in capital structure, tax jurisdictions, and asset depreciation — making it easier to compare companies.
For business owners, EBITDA answers: “How much cash does my business generate from operations?” It's not a perfect measure (it ignores capital expenditures and working capital changes), but it's the standard benchmark.
EBITDA Margin
EBITDA margin (EBITDA ÷ Revenue) tells you what percentage of revenue translates into operational earnings. A 20% EBITDA margin means $0.20 of every dollar earned is operational profit.
Example
A marketing agency does $2M in annual revenue. Net income is $180K. Interest on their business loan is $30K, taxes are $50K, and depreciation on office equipment is $40K. EBITDA = $180K + $30K + $50K + $40K = $300K. That's a 15% EBITDA margin. If a buyer values agencies at 4-6x EBITDA, this business is worth roughly $1.2M-$1.8M. Improving EBITDA by just $50K could add $200K-$300K to the sale price.
Benchmarks
Healthy EBITDA margins vary by industry. SaaS companies often hit 20-35%. Professional services firms typically land between 15-25%. Retail and e-commerce run thinner at 5-15%. Construction and manufacturing are usually 8-15%. What matters most is your trajectory — a business with 12% EBITDA margin trending upward is more attractive than one at 20% and declining.
What to Watch For
- EBITDA is not cash flow. It ignores capital expenditures, debt payments, and changes in working capital. A company with strong EBITDA can still be cash-negative if it's investing heavily in equipment or carrying slow-paying receivables.
- Owner add-backs can inflate the number. In M&A, sellers often adjust EBITDA for “owner-related expenses” like above-market salary or personal expenses run through the business. Buyers will scrutinize every add-back.
- One-time costs mask the real run rate. A legal settlement or office move creates a temporary dip. Adjusted EBITDA strips these out, but only if the adjustments are genuine and non-recurring.
How CentSight Helps
CentSight calculates your EBITDA in real time from your QuickBooks data. Track it monthly, compare to industry benchmarks, and model scenarios: “What would our EBITDA be if we cut $20K in monthly expenses?”