What Is EBITDA? How to Calculate It and Why It Matters in M&A

EBITDA is one of the most important financial indicators for understanding a company's true profitability, and a key figure in any business sale or M&A deal. Investors, private equity funds, and strategic buyers look at it before almost any other number when evaluating a company.

In this guide, we explain what EBITDA is and how to calculate it step by step with a real example, how it differs from other indicators such as EBIT or net profit, and why it is the most widely used metric for valuing companies in M&A deals.

What is EBITDA?

EBITDA is an acronym that stands for Earnings Before Interest Taxes Depreciation and Amortization; in other words, earnings before interest, taxes, depreciation, and amortization.

It is an accounting measure used to calculate gross operating profit, giving you an indicator of the profitability a company generates through its core productive activity.

It is a ratio that lets us analyze the profits or losses a company generates from its core business, before deducting amortization and depreciation costs, which do not directly involve cash flows (cash going out or coming in), and before taking into account financial results and taxes, which do not derive directly from the company's main activity.

In the context of M&A, EBITDA is the basis on which valuation multiples are calculated. If a sector has an average multiple of 6x EBITDA, a company with €500,000 in EBITDA would be valued at approximately €3 million. That's why knowing and optimizing your EBITDA before selling a business can have an enormous impact on the final price.

How do you calculate EBITDA?

There are different ways to calculate it, but the most common are:

1. Starting from sales: take net revenue and subtract the various operating expenses, such as supplies or purchases, personnel expenses, and other operating costs, but not amortization or depreciation costs. ‍
2. Starting from net income: take net income and add back financial results and taxes paid, which gives you EBIT (Earnings Before Interest and Taxes; earnings before interest and taxes). To this amount, add amortization and depreciation expenses.

Let's look at a concrete example.

📊 Practical example: how to calculate an SME's EBITDA

Imagine a Spanish company with the following figures in its annual income statement:

1. Revenue (sales): €2,000,000
2. Supplies and purchases: €800,000
3. Personnel expenses: €600,000
4. Other operating expenses (rent, utilities, marketing): €200,000
5. Amortization and depreciation: €100,000
6. Financial result: -€30,000
7. Corporate income tax: €70,000

Applying the starting from sales method:

EBITDA = 2,000,000 - 800,000 - 600,000 - 200,000 = €400,000

In other words, this company generates €400,000 in gross operating profit before deducting amortization, taxes, and interest. If we applied a sector multiple of 6x, its approximate valuation in an M&A deal would be €2.4 million.

EBITDA margin

Once EBITDA has been calculated, it's common to also calculate the so-called EBITDA margin, which is the ratio between EBITDA and a company's revenue, and is interpreted as the gross profit margin the company earns on all the revenue it generates.

The formula is very simple:

EBITDA margin (%) = (EBITDA / Revenue) × 100

Continuing with the previous example, a company with €400,000 in EBITDA and €2,000,000 in revenue would have an EBITDA margin of 20%, a very solid figure in most sectors.

But what is considered a good EBITDA margin? It depends heavily on the sector. These are the approximate ranges in Spain:

1. Professional services and consulting: 15%–25%
2. Software and SaaS: 20%–40%
3. Industry and manufacturing: 8%–15%
4. Distribution and retail: 4%–10%
5. Hospitality and food service: 10%–20%
6. Construction: 5%–12%

In M&A deals, buyers look not only at the absolute value of EBITDA but also at the stability and trend of the margin over the last 3–5 years. A company with a growing EBITDA margin attracts better multiples than one with a flat or declining margin.

EBITDA vs. EBIT vs. net profit: how do they differ?

It's common to confuse EBITDA with other profitability indicators such as EBIT or net profit. Although they are related, they measure different things:

1. EBITDA: earnings before interest, taxes, depreciation, and amortization. It measures pure operating profitability.
2. EBIT: earnings before interest and taxes. It is EBITDA minus amortization and depreciation. It is also known as operating income.
3. Net profit: the bottom line after deducting absolutely everything (including interest and taxes). It's what the company actually "keeps."

Going back to the previous example, this would be the company's full breakdown:

1. EBITDA: €400,000
2. EBIT (EBITDA - amortization): 400,000 - 100,000 = €300,000
3. Earnings before taxes (EBIT + financial result): 300,000 - 30,000 = €270,000
4. Net profit (after taxes): 270,000 - 70,000 = €200,000

Why does this difference matter in M&A? Because EBITDA lets you compare companies with very different capital structures (more or less leveraged), from different countries (with different tax regimes), or with different amortization policies. It's the cleanest way to measure whether the core business is profitable, without financial or accounting decisions distorting the comparison.

What is EBITDA used for?

One of EBITDA's great advantages is that it lets you analyze a business's profitability by focusing on its core activity, without the different ways of computing amortization and depreciation costs, differences in tax matters, or the financing structure affecting the calculation.

In short, calculating EBITDA makes it easier to compare companies from very different sectors, with different capital structures, or from different countries, by focusing on a company's ability to generate profits from the core of its business model.

In practice, EBITDA has three key applications:

1. Comparing companies with each other, especially if they belong to different sectors or have very different capital structures.
2. Valuing companies in M&A deals, by applying sector multiples to recurring EBITDA.
3. Assessing the ability to generate cash, which is essential for companies considering taking on debt (for example, in leveraged deals such as an LBO).

Find out what your business is worth now

This last application is especially relevant in debt-financed deals. To learn more, read our guide on what an LBO is and how it works.

The limitations of EBITDA: what it doesn't tell you

Despite its usefulness, EBITDA has important limitations you should be aware of before using it as your only reference:

1. It doesn't reflect investments in fixed assets. A company with high EBITDA that constantly needs to reinvest in machinery or technology may have much lower real cash flow.
2. It ignores debt and interest. Two companies with the same EBITDA can be in radically different financial situations if one is heavily indebted and the other is not.
3. It's not an official metric. Unlike net profit, EBITDA is not standardized by accounting standards (IFRS/PGC, the Spanish General Accounting Plan), which leaves room for some creative manipulation in how it's calculated.
4. It can inflate real profitability. Some companies present an "adjusted EBITDA" that excludes extraordinary expenses that are actually recurring, distorting the comparison.

For these reasons, in professional M&A deals EBITDA is never analyzed on its own. It is complemented by metrics such as free cash flow, discounted cash flow (DCF), or analysis of OPEX and CAPEX, which provide a more complete view of the company's financial health.

EBITDA in M&A deals: what buyers look at

When a private equity fund, a strategic buyer, or a corporate investor evaluates a company, EBITDA is the benchmark metric. But they don't look at EBITDA "as is" in the annual accounts: they calculate recurring or normalized EBITDA.

What is recurring or normalized EBITDA?

Recurring EBITDA is EBITDA adjusted to reflect the real, sustainable profitability of the business, removing extraordinary income or expenses that won't recur in the future. It's the figure to which valuation multiples are applied in a transaction.

The most common adjustments are:

1. Owner salaries above or below market rate: if the owner earns €200,000 but an equivalent managing director would earn €80,000, EBITDA is adjusted upward by the difference.
2. Personal expenses charged to the company (cars, travel, and meals unrelated to the business).
3. Extraordinary income or expenses that are non-recurring (a one-off asset sale, a severance or compensation payment, a restructuring).
4. Rent paid to related parties that is not at market price.
5. Accounting provisions that are atypical or extraordinary.

This adjustment is made during financial due diligence, a key stage in any sale process in which the quality of the reported EBITDA is reviewed in detail.

How the EBITDA multiple is applied to value the company

Once you have recurring EBITDA, a sector multiple is applied to estimate the company's value (enterprise value). Typical multiples in Spain range from:

Industrial SMEs and B2B services: 4x–6x EBITDA

Technology and SaaS companies: 8x–15x EBITDA

Distribution and retail: 3x–5x EBITDA

Healthcare and professional services: 6x–10x EBITDA

For example, if an industrial SME has recurring EBITDA of €800,000 and a 5x multiple is applied, its enterprise value would be €4 million. From there, net debt is deducted and other items are adjusted to arrive at the equity value (the price the seller will actually receive).

To learn more about how these multiples are built and applied, we recommend our guide on EBITDA multiples in business valuation.

Frequently asked questions about EBITDA

Is it better to have high EBITDA or high net profit?

It depends on the goal. To compare operating profitability between companies, EBITDA is more useful because it removes factors outside the core business (debt, taxes, amortization). To measure what the company actually earns, net profit is a more faithful reflection of reality. M&A deals use both: EBITDA to value the company, and net profit to assess its overall financial health.

What is negative EBITDA and what does it mean?

Negative EBITDA means the company isn't profitable even in its core activity, before deducting amortization, interest, and taxes. It's a major warning sign. It usually happens in startups in an aggressive investment phase (where it's expected) or in mature companies with structural problems (where it's worrying). In an M&A deal, negative EBITDA makes valuation by multiples extremely difficult.

Does EBITDA appear in the official income statement?

Not directly. EBITDA is not a metric recognized by Spanish (PGC) or international (IFRS) accounting standards, so it doesn't appear as such in the annual accounts. It is calculated manually by adding or subtracting specific line items from the official income statement. That's why it's important to always calculate it using the same criteria so companies can be compared fairly.

What's the difference between EBITDA and adjusted EBITDA?

EBITDA is the direct calculation from the accounting data. Adjusted EBITDA (also called normalized or recurring EBITDA) removes extraordinary or non-recurring items to reflect the business's sustainable profitability. In business sales, adjusted EBITDA is the figure used to apply valuation multiples, and it must always be validated during financial due diligence.

What's a good EBITDA multiple for selling my business?

It depends on your company's sector, size, and growth. In Spain, typical multiples for SMEs range from 4x to 8x EBITDA, although companies in high-demand sectors (technology, healthcare, software) can reach multiples above 10x. Other influencing factors include revenue recurrence, customer diversification, the quality of the management team, and growth potential.

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