EBITDA

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. It is the amount of profit left over after Revenue has been reduced by Cost of Goods Sold and Operating Expenses.

EBITDA is typically used as the true measure of the profitability of a business in a transaction due to the lines after EBITDA being subject to change post-transaction.

The lines after EBITDA are Interest, Taxes and Depreciation. Here’s how they could change post-transaction:

Interest: Typically, a business’s debts are cleared once they’re acquired

Taxes: The tax rate is not something that can change and restructuring post-transaction can cause the amount of taxable income to change dramatically

D&A: This one doesn’t really change but it also doesn’t really matter since it’s not actually a cash outflow expense, just an accounting expense. More here.

Revenue = $500

COGS = $200

OpEx = $200

D&A = $25

Interest = $25

Taxes = $25

So if we wanted to solve for EBITDA:

EBITDA = $500 - $200 - $200 = $100

When we say EBITDA is mainly used in transactions, we mean that EBITDA multiples are typically used to value a business. More here.