How do I calculate EBITDA?

Either revenue minus COGS minus operating expenses excluding D&A, or net income plus interest, taxes, depreciation and amortisation. Both must give the same figure. On $2m revenue, $800k COGS and $400k operating expenses, EBITDA is $800,000 — a 40% margin.

Why exclude depreciation and amortisation?

Because they are non-cash allocations of money spent in earlier years, and they vary with accounting choices rather than operating performance. Removing them lets two businesses with identical operations be compared even if one bought its equipment last year and the other a decade ago.

Is EBITDA the same as cash flow?

No, and treating it as such is the common error. EBITDA ignores capital expenditure, working capital movements, and the interest and tax you actually pay. An asset-heavy business showing strong EBITDA may generate little free cash once it replaces worn equipment.

What EBITDA multiple is my business worth?

It depends on sector, size, growth and owner dependence. Small-business conventions run roughly 2–4× for professional services, 3–6× for manufacturing and software, and 1–3× for retail and restaurants. Larger and less owner-dependent businesses attract higher multiples within any sector.

What is adjusted EBITDA?

EBITDA with add-backs for items claimed to be one-off or owner-specific — an above-market owner salary, a non-recurring legal cost. Some are legitimate; many are aggressive. Because each add-back is multiplied at sale, a $50,000 add-back at 4× asks the buyer for $200,000 more, so each deserves individual scrutiny.

Why does my valuation differ from what I would receive?

A multiple gives enterprise value — the operation's worth. Equity value is that minus debt plus cash. A $3.2m enterprise value with $700k debt and $100k cash is about $2.6m of equity, and deal structure with seller financing or earn-outs can reduce cash at close further still.

EBITDA Calculator — Business Valuation Tool

Calculate EBITDA and estimate your business valuation range using industry-standard revenue multiples. Used by M&A advisors and business buyers.

Annual Revenue ($)

Cost of Goods Sold ($)

Operating Expenses excl. D&A ($)

Depreciation ($)

Amortization ($)

Interest Expense ($)

Income Taxes ($)

Industry

EBITDA

$800,000

Margin: 40.0%

Gross Profit

$1,200,000

EBIT

$730,000

Base Valuation

$3.20M

EV Range

$1.60M–$4.80M

Profitability Waterfall

Business Valuation Range — Professional Services (2×–6× EBITDA)

Analysis & insights

Your EBITDA: $800,000 (40.0% margin on $2,000,000 revenue). Industry-multiple valuation range: $1,600,000 (conservative) → $3,200,000 (base case) → $4,800,000 (optimistic). EBITDA isolates the operating performance from financing decisions (interest) and accounting choices (D&A) — it's the universal comparison metric for businesses sold to non-operator buyers (PE, strategics).

Exceptional margin

Premium — software, SaaS, or category-leading brands. Highly attractive to buyers.

Risk & benchmark gauge

Current band

Exceptional

40.0% EBITDA margin

0255075100

Below avgHealthyStrongExceptional

Industry benchmarks

EBITDA$800,000
EBITDA margin40.0%
Valuation (low)$1,600,000
Valuation (base)$3,200,000
Valuation (high)$4,800,000
Industry median (services)10-15% EBITDA margin
SaaS / software20-30%+

Key insights

EBITDA ≠ cash flow

EBITDA ignores capex, working capital changes, and taxes. A company with $10M EBITDA might have $0 free cash flow if it requires $10M/yr in capex to maintain.

EBITDA growth > absolute EBITDA

A $2M EBITDA growing 30%/year often trades at higher multiple than a flat $5M EBITDA. Buyers price growth heavily.

"Adjusted EBITDA" is where seller storytelling lives

Add-backs (owner salary, discretionary expenses, one-time items) often inflate adjusted EBITDA by 20-50%. Buyers heavily scrutinize each adjustment.

Recommended actions(3)

Track EBITDA monthly with clean adjustments

High priority

Document every add-back with supporting context (one-time vs recurring, owner-specific vs operational). Makes the eventual sale process dramatically faster.

Build a quality of earnings package

Medium priority

Pre-sale, hire a CPA firm to produce a Quality of Earnings (QofE) report — defends EBITDA add-backs to buyers and supports premium pricing.

Reduce customer concentration

Medium priority

Buyers discount EBITDA multiples by 20-40% when one customer is >25% of revenue. Diversify 12-24 months before listing.

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This tool is for educational purposes only and does not constitute financial, tax, or investment advice. Consult a qualified financial professional for advice specific to your situation.

What is EBITDA?

EBITDA is earnings before interest, taxes, depreciation and amortisation. It exists to answer a specific question: how much cash does the underlying business operation generate, before the effects of how it was financed, where it is taxed, and how its past capital spending is being written off.

Each letter is stripped out for a reason. Interest reflects the capital structure the current owner chose, not the business. Taxes reflect jurisdiction and structure. Depreciation and amortisation are non-cash accounting allocations of money spent in earlier years. Remove all four and two companies with identical operations become comparable even if one is debt-laden and the other is not.

That comparability is why buyers price businesses on EBITDA multiples. It is also why EBITDA is easy to abuse — the same exclusions that create comparability can flatter a business that genuinely does need to replace its equipment.

The formula — how to calculate EBITDA

Top-down: EBITDA = Revenue − COGS − Operating expenses (excl. D&A) Bottom-up: EBITDA = Net income + Interest + Taxes + Depreciation + Amortisation EBITDA margin = EBITDA ÷ Revenue × 100

COGS: = direct cost of producing what you sell
Operating expenses: = salaries, rent, marketing, admin — everything to run the business EXCLUDING D&A
Depreciation: = the annual write-down of tangible assets already purchased
Amortisation: = the same for intangibles such as software or acquired goodwill

Both routes must give the same answer. If they disagree, D&A has been double-counted — the most common error, caused by subtracting D&A inside operating expenses and then adding it back.

Step-by-step example

01Revenue $2,000,000. COGS $800,000. Operating expenses excluding D&A $400,000. Depreciation $50,000. Amortisation $20,000. Interest $30,000. Taxes $60,000.
02Gross profit: $2,000,000 − $800,000 = $1,200,000.
03EBITDA: $1,200,000 − $400,000 = $800,000.
04EBIT: $800,000 − $50,000 − $20,000 = $730,000.
05Net income: $730,000 − $30,000 − $60,000 = $640,000.
06Check bottom-up: $640,000 + $30,000 + $60,000 + $50,000 + $20,000 = $800,000. The two routes agree.
07EBITDA margin: $800,000 ÷ $2,000,000 = 40%.
08At a 4× professional services multiple, indicative enterprise value is $3.2 million. Note how sensitive that is: a $70,000 error in EBITDA moves the valuation by $280,000.

What EBITDA deliberately hides

Charlie Munger called it "bullshit earnings", and the criticism has force. The exclusions that make EBITDA comparable also remove costs that are entirely real.

Depreciation is non-cash in the year it appears, but it represents equipment that genuinely wears out and will genuinely need replacing. A haulage company with a fleet has real capital costs that EBITDA makes invisible. For asset-heavy businesses, EBITDA can substantially overstate the cash available to an owner.

Interest is excluded because capital structure is the owner's choice — but a buyer taking on that debt will absolutely be paying it. EBITDA describes the business; it does not describe what lands in your pocket.

Working capital is missing entirely. A business can show healthy EBITDA while consuming cash through growing inventory and receivables. Profitable companies fail this way with some regularity.

The honest framing: EBITDA is a comparison tool for operations, not a measure of cash generation. Free cash flow — EBITDA less capital expenditure, less working capital change, less cash taxes and interest — answers the cash question.

Watch for "adjusted EBITDA"

Sellers routinely present adjusted or normalised EBITDA, adding back items claimed to be one-off or owner-specific. Some adjustments are legitimate — a genuinely non-recurring legal settlement, an above-market owner salary. Others are aggressive. Every add-back raises the sale price by the multiple, so a $50,000 add-back at 4× asks the buyer for $200,000 more. Scrutinise each one individually.

How multiples actually work

A multiple is shorthand for how many years of current earnings a buyer will pay. A 4× multiple means roughly four years to recover the purchase price from operating earnings, ignoring growth.

Multiples vary by industry because the underlying businesses differ in risk, growth and transferability. Software commands higher multiples than restaurants because revenue is recurring, margins are high, and the business does not depend on one location or one chef.

Typical EBITDA multiple ranges for small businesses

Sector	Conservative	Typical	Strong
SaaS / software	3×	6×	12×
Healthcare services	4×	7×	10×
Technology services	4×	7×	12×
Manufacturing	3×	5×	7×
Professional services	2×	4×	6×
E-commerce	2×	3.5×	5×
Retail	1×	2.5×	4×
Restaurant	1.5×	2.5×	3.5×

Market conventions observed in small-business transactions, not standards. Actual multiples depend on size, growth, customer concentration and how dependent the business is on its owner. Larger businesses generally attract higher multiples than smaller ones in the same sector.

Enterprise value is not what you receive

A multiple applied to EBITDA produces enterprise value — the value of the business operation itself. That is not the cheque the seller banks.

Equity value is enterprise value minus debt plus cash. A business valued at $3.2 million with $700,000 of debt and $100,000 of cash has equity value of roughly $2.6 million.

Deal structure moves it further. Small business sales frequently involve seller financing, earn-outs contingent on future performance, and escrow holdbacks against warranty claims. A headline price of $3.2 million might be $2 million at closing with the balance paid over years and conditional on results.

The practical consequence is that comparing headline prices between deals is close to meaningless without knowing the structure. Cash at close is the number that matters.

Key considerations

Use both the top-down and bottom-up routes as a cross-check; they must agree.
Exclude D&A from operating expenses if you enter them separately, or you will double-count.
EBITDA overstates available cash for asset-heavy businesses that must replace equipment.
Free cash flow, not EBITDA, answers what an owner actually takes home.
Scrutinise every add-back in an adjusted EBITDA figure — each is multiplied at sale.
Enterprise value minus debt plus cash gives equity value, which is what a seller receives.
Multiples are market conventions that move with interest rates and credit conditions.

Common mistakes to avoid

Double-counting D&A by subtracting it in operating expenses and adding it back.
Treating EBITDA as cash flow for a capital-intensive business.
Accepting a seller's adjusted EBITDA without examining each add-back.
Confusing enterprise value with the proceeds a seller actually receives.
Applying a large-company multiple to a small owner-dependent business.
Ignoring working capital, which can consume cash while EBITDA looks healthy.

Frequently asked questions

Sources & references

Written and fact-checked by the CalcProLabs Editorial Team. Read our calculation methodology and editorial policy.

Last updated July 28, 2026