EBITDA

Also called Earnings before interest, tax, depreciation and amortisation

Profit before the effects of how a business is financed and how it accounts for its assets. Useful for comparison, easy to hide behind.

What it means

EBITDA takes operating profit and adds back depreciation and amortisation. Interest and tax are already excluded.

The idea is to strip out things that say more about a company's financing and accounting choices than about how the underlying trade performs, so two similar businesses can be compared.

Why it matters

It is the number buyers and investors usually work from. Business valuations are commonly quoted as a multiple of EBITDA, so if you are ever selling, this is the figure the price is built on.

For an owner, the practical use is that improving EBITDA — better margins, lower overheads — is what raises the sale price, and it does so by a multiple rather than pound for pound.

What it looks like in practice

Buyers will look at "adjusted EBITDA", adding back genuinely one-off costs and normalising owner's pay to a market salary. Those adjustments are negotiated, and having them documented and defensible is worth real money.

What to watch out for

EBITDA is not cash. It deliberately ignores interest, tax and capital spending — all of which are unavoidable. A business with heavy equipment needs to replace it, and EBITDA is silent about that.

Be sceptical of anyone who only ever quotes EBITDA. It is the most flattering profit figure available, which is precisely why it is the one that gets quoted.

Where to get proper advice

A corporate finance adviser or an accountant with sale experience, if you are heading towards a sale. Ordinary annual accountants do not always work in these terms.