What is EBITDA?

Earnings Before Interest, Taxes, Depreciation, and Amortization

A proxy for operating cash flow that strips out:

• Financing decisions (Interest)
• Tax jurisdictions (Taxes)
• Accounting methods (D&A)

Core Formula

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

Alternative (from Revenue):

EBITDA = Revenue - COGS - Operating Expenses + D&A

Common Adjustments (Add-Backs)

Adjustment	Typical Range	Notes
Owner compensation above market	Full excess	Compare to market rate for role
One-time legal/consulting	100%	Must be truly non-recurring
Related party expenses	Case-by-case	Rent, services at non-market rates
Non-recurring repairs	100%	Major equipment, facility
Startup costs	100%	New locations, product lines

EBITDA Margins by Industry

Industry	Low	Average	Top Quartile
Distribution	3%	6%	10%+
Manufacturing	8%	12%	18%+
Home Services	10%	15%	22%+
SaaS	15%	25%	40%+

Red Flags in EBITDA

1. Aggressive add-backs - More than 30% of EBITDA from adjustments
2. Declining trends - 3+ quarters of margin compression
3. Working capital games - Stretching payables, stuffing channels
4. Capex deferrals - Maintenance capex below D&A

Quick Ratios

Ratio	Formula	Healthy Range
EBITDA Margin	EBITDA / Revenue	Industry dependent
Interest Coverage	EBITDA / Interest	> 3.0x
Debt / EBITDA	Total Debt / EBITDA	< 4.0x
Rule of 40 (SaaS)	Growth % + EBITDA %	> 40%

Valuation Multiples

Enterprise Value = EBITDA × Multiple

Business Type	Multiple Range
Small business (under $1M EBITDA)	3-5x
Lower middle market ($1-5M)	4-7x
Middle market ($5-15M)	6-9x
Upper middle market ($15M+)	8-12x

Key Distinctions

EBITDA vs. Cash Flow

• EBITDA ignores working capital changes
• EBITDA ignores capex requirements
• Free Cash Flow = EBITDA - Capex - ΔWC - Taxes

Adjusted EBITDA vs. GAAP

• Adjusted = with legitimate add-backs
• GAAP = no adjustments
• Always show both in reporting

Monthly Tracking Template

Revenue:           $________
- COGS:            $________
= Gross Profit:    $________
- Operating Exp:   $________
+ D&A:             $________
= EBITDA:          $________
EBITDA Margin:     _______%