Your business is valued based on a multiple of adjusted EBITDA — the industry-standard measure of profitability used by private equity buyers.
What Is EBITDA? EBITDA stands for: Earnings Before Interest, Taxes, Depreciation, and Amortization
It’s essentially your core operating profit — before non-operating and non-cash expenses — and is often close to your reported taxable profit.
What Is Adjusted EBITDA? Adjusted EBITDA is a refined version of EBITDA that excludes:
• One-time or non-recurring expenses
• Discretionary owner-related spending
• Unusual or non-operational costs
Examples of Add-Backs:
• A family vacation charged to the business
• Salary of a terminated, unreplaced employee
• Legal fees for a one-off lawsuit
This gives buyers a clear view of the company’s true earning power going forward. The multiple buyers pay is off of Adjusted EBITDA.