Glossary
EBITDA
Earnings before interest, tax, depreciation and amortisation. A measure of a business's operating profit that strips out financing costs, tax and the accounting charges for wearing out assets, so that businesses can be compared on their underlying trading.
In plain English
EBITDA starts with operating profit and adds back depreciation and amortisation (the accounting charges that spread the cost of assets over time). Interest and tax are below operating profit, so they are already excluded. The result is a rough measure of the cash profit the business generates from trading, before decisions about how it is financed or how assets are accounted for.
For a typical agency, with few fixed assets, EBITDA is often close to operating profit. For businesses with significant equipment, technology or acquired intangibles, the difference can be larger.
Why it matters
EBITDA is the figure most buyers use as the starting point for valuing an agency, usually by applying an EBITDA multiple to arrive at an enterprise value. In practice, buyers rarely use reported EBITDA on its own. They adjust it for one-off, non-recurring and non-commercial items to produce normalised EBITDA, which is the figure that matters in a negotiation.
Keeping the terms distinct
- EBITDA is the accounting measure, as reported.
- Normalised (or adjusted) EBITDA is EBITDA after adjustments agreed to reflect the underlying business.
- EBITDA multiple is the number by which normalised EBITDA is multiplied to express enterprise value.
What to watch for
- EBITDA ignores capital expenditure and working capital movements, so it is not the same as cash generated. Buyers will look at both.
- How costs are classified affects EBITDA. Consistent, well-documented management accounts avoid arguments later.
- Founder remuneration, and its replacement cost, is one of the most common areas of adjustment in agency transactions.
Written by Motion Advisory Partners as general guidance. Accounting treatment depends on the applicable standards.