EBITDA is most often used when valuing established, trading businesses — particularly in mergers and acquisitions, private equity transactions and lending decisions. A valuation is typically expressed as a multiple of EBITDA, on the basis that it approximates the cash the business generates from operations before financing structure, tax position and depreciation policy are taken into account.
The reason for its popularity is comparability. Two similar businesses may report very different net profits simply because one is heavily borrowed, one owns its assets outright while the other leases, or the two apply different depreciation rates. Stripping out interest, tax, depreciation and amortisation gets closer to a like-for-like comparison of operating performance.
In practice, buyers and lenders rarely use the reported figure unadjusted. They typically normalise it — removing one-off items, adjusting owner-manager remuneration to a market rate, and stripping out non-trading costs — to produce an “adjusted EBITDA” they consider sustainable. The multiple applied then depends on sector, growth, customer concentration and how much of the profit depends on the current owner.
EBITDA is less suitable where a business is very capital-intensive, since ignoring depreciation ignores the real cost of replacing assets, or where the business is pre-revenue or highly seasonal. It is also not a substitute for cash flow.
Valuation is specialist work. CW Asset Finance is a credit broker, not an accountant or a valuer — this is general information and you should take professional advice on any actual transaction.