Most owners know their turnover to the pound and their profit to the nearest thousand. Then a buyer or their accountant starts talking about EBITDA, and the conversation moves onto a number that isn't printed anywhere in your accounts. Knowing what it is before that conversation helps, because it's the number your price is likely to be built on.
Our guide to how to value a business covers the wider method. This one stays with the number itself, including how buyers adjust it and why it isn't the same as cash.
EBITDA in plain words
EBITDA stands for earnings before interest, tax, depreciation and amortisation. Each of the four is something taken off your profit that says little about how well the business trades.
- Interest depends on how you've chosen to fund the business. A buyer will fund it their own way.
- Tax depends on how the business is owned and structured, which a sale can change.
- Depreciation spreads the cost of things you can touch, such as vans and machines, over the years you use them.
- Amortisation does the same for things you can't touch, such as software or goodwill bought with another business.
Strip those out and you're left with the profit the business makes from its day to day work. That's why buyers like it. Two firms with the same trade but different loans and different-aged equipment can be compared on the same footing.
All four figures are in your statutory accounts or the detailed profit and loss account your accountant sends with them. Profit before tax and interest payable are on the face of the profit and loss account. Depreciation and amortisation are usually in the notes, under tangible and intangible fixed assets, or in the detailed account.
EBITDA isn't a measure that UK accounting standards define, and it doesn't appear in statutory accounts. It's worked out from them. When the Financial Reporting Council reviewed how listed companies reported adjusted profit in 2016, it found little agreement on what gets adjusted, and it questioned why costs that kept recurring had been left out. Expect the same argument, on a smaller scale, in any sale.
A made-up example, from profit to adjusted EBITDA
Take a made-up company that installs and services heating systems. It has a fleet of vans and a bank loan, and the owner still runs most of the jobs. Its accounts show a profit before tax of £150,000.
| Step | Amount | Running total |
|---|---|---|
| Profit before tax, from the accounts | £150,000 | £150,000 |
| Add back interest on the bank loan | £10,000 | £160,000 |
| Add back depreciation on vans and tools | £35,000 | £195,000 |
| Add back amortisation of software | £5,000 | £200,000 (EBITDA) |
| Add back legal costs on a dispute that's now settled | £15,000 | £215,000 |
| Add back the owner's car and other personal costs | £8,000 | £223,000 |
| Take off a manager's full cost, less the £12,000 salary the owner takes | (£48,000) | £175,000 (adjusted EBITDA) |
The first three steps are arithmetic. The last three are judgement, and that's where negotiation happens. The owner takes a small salary and the rest as dividends, which aren't a business cost, so the accounts never show what it would cost to pay someone to do the owner's job. Here, a manager would cost £60,000 with employer's National Insurance and pension, so the buyer takes off the £48,000 difference.
So the owner might have quoted £200,000. A buyer would work from £175,000, and would want invoices or correspondence for each add-back. To put your own figures through the same steps, try our adjusted profit calculator.
EBITDA, operating profit and profit before tax
You'll hear several measures of profit in a sale. They stack up in this order.
- Profit before tax is the bottom of your profit and loss account before Corporation Tax.
- Operating profit, sometimes called EBIT, is profit before interest and tax.
- EBITDA goes one step further and adds back depreciation and amortisation.
- Adjusted or maintainable EBITDA is EBITDA after the buyer's adjustments. It's the figure that usually gets multiplied.
Buyers also look at the most recent 12 months, not only your last year end. If your year ended in March and you're selling in October, they'll want the 12 months to September from your management accounts, with EBITDA worked out the same way.
Why EBITDA isn't cash
EBITDA is a measure of profit, and profit isn't the same as money in the bank. For an owner, this is the part that matters most, because a buyer will look at how much of the EBITDA turns into cash before deciding what to pay.
Capital spending
When the heating company buys a van, the cost doesn't hit the profit in one go. It comes through as depreciation over several years, and EBITDA leaves depreciation out. The cash, though, has gone. In a business that needs new kit every few years, such as haulage or plant hire, EBITDA can flatter the business. Buyers will look at what you've spent on equipment over the last few years and what's due soon.
Watch for costs that have been capitalised, meaning recorded as an asset rather than a cost. Some development work and some improvements to premises can be treated this way. It's allowed within the rules, but it moves spending below EBITDA, and a buyer's accountant will look for it.
Working capital
Working capital is the money tied up in stock and in what customers owe you, less what you owe suppliers. As sales grow, more cash usually gets tied up, even though the profit looks fine. If you chase payments harder in the months before a sale, the cash will look strong, but a buyer usually adjusts for that at completion.
Interest and tax
EBITDA leaves out interest and tax, but both still have to be paid. A buyer funding the purchase with a loan will care a great deal about whether the cash the business produces can cover the repayments.
Back to the made-up company, using round figures.
| From adjusted EBITDA to cash | Amount |
|---|---|
| Adjusted EBITDA | £175,000 |
| Less average spending on vans and tools each year | (£40,000) |
| Less extra money tied up in stock and debtors as sales grow | (£15,000) |
| Cash from trading, before interest, loan repayments and tax | £120,000 |
Two businesses with the same adjusted EBITDA can produce very different amounts of cash. A buyer will value the one that turns more of its EBITDA into cash more highly.
Leases, and the change to company accounts in 2026
Rent and other lease costs used to sit in a company's running costs, above EBITDA. That has changed for many companies. The Financial Reporting Council amended FRS 102, the main UK accounting standard, for accounting periods beginning on or after 1 January 2026. Most leases now go on the balance sheet. The rent no longer appears as a cost. It's replaced by depreciation of the leased asset and interest on the lease, both of which EBITDA leaves out.
The FRC notes that measures such as EBITDA may change as a result, and so may the way loan covenants are tested. Companies reporting under IFRS 16 have worked this way since 2019. Small companies using section 1A of FRS 102 are caught too, because that section simplifies presentation and disclosure and keeps the same measurement rules. Micro-entities using FRS 105 keep the old treatment, and under FRS 102 leases of under 12 months and leases of low-value items can stay off the balance sheet.
Suppose the made-up company rents its unit for £30,000 a year. Under the new rules its EBITDA would rise by about £30,000, while the cash it pays the landlord stays exactly the same. Two points follow from that.
- Year-on-year figures may not compare. The first accounts under the new rules don't restate the year before, so a jump in EBITDA may be the accounting change rather than better trading. Ask your accountant to show both years on the same basis.
- Agree one treatment with the buyer. If a buyer values the business on EBITDA with the rent added back, they may count the lease as debt and take it off the price. If they take the rent off EBITDA, the lease shouldn't also be treated as debt.
How buyers use EBITDA
Once the adjusted figure is agreed, a buyer typically multiplies it by a figure that reflects risk and growth. That gives a value for the business before cash and debt, which is then adjusted to reach the price for your shares. The multiple is a measure of confidence, and it's driven by things like how much the business relies on you and how spread out your customers are. A multiple quoted for someone else's business tells you little about yours, so treat figures you hear second-hand with care.
The buyer's accountants will test every adjustment during due diligence. A lender backing the buyer will look at EBITDA too, both to decide how much to lend and to set the covenants the business must keep to. That's another reason the lease treatment matters.
The agreed figure, and how the price will be adjusted for cash and debt at completion, should be pinned down in your heads of terms. If it's left vague, it tends to come back as a price cut later.
Getting your EBITDA ready before a sale
You can do most of this work before a buyer is involved. Ask your accountant to prepare adjusted EBITDA for the last three years and the latest 12 months, with each adjustment listed and evidenced. Take personal costs out of the business now, so there's less to adjust. Keep a list of what you've spent on equipment and what's due for replacement. If you rent premises, get both years shown on the same basis for the 2026 lease change.
A figure you've worked out and can support is much harder to argue down than one a buyer has built for you.