EBITDA Is Not EBITDA

In our book, Game-Changing Advisory Boards, and throughout every business book, you see EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) used as if it is an easily measured figure. It would be easy to assume that EBITDA is earnings, plus interest paid, plus taxes paid, plus depreciation, plus any amortization taken by the company. Logically, all these measures would be made to conform to commonly accepted accounting principles. It would then be easy for any sophisticated buyer and seller to agree on the EBITDA and multiply it by an evaluation multiplier that is the industry norm to get the value of the company…more or less.

And there is the rub—the more or less.

In every sale of a company, there comes the time when the buyer says something like, “I think we need to adjust the EBITDA to reflect a proper depreciation schedule.” Or, “Your interest payments are made on working capital, and that varies dramatically by quarter, so I think we need to adjust the EBITDA to reflect the normalized interest payment schedule.” Or the seller says, “I took a higher salary than the industry norm, so this EBITDA should be adjusted to reflect what would be paid to a normal executive after you buy it.” Or an accountant says, “That is the EBITDA today, but in two years we will be on the international accounting system. Then the EBITDA will need to be adjusted.”

Notice the word “adjusted” in each of those sentences?

A major part of the value of any sale is determined by the negotiation between buyer and seller on what is the true EBITDA. After the accountants and valuation firms on both sides have excluded and added back earnings, they arrive at their EBITDA number.

EBITDA is not EBITDA until both buyer and seller agree on the number.

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