What is EBITDA?

Answer:
If you read business blogs, magazines or follow stocks

then you've probably come into contact with the abbreviations EBITDA. More specifically, this term is often associated with Merger and Acquisitions. EBITDA stands for earnings before interest, taxes, depreciation and amortization. Ok, so what in the world does that mean?

Good question, what exactly is earnings before interest, taxes, depreciation and amortization? To be exact, it's a bunch of accounting terms that together don't equate to anything but an approximate number people like to associate with profits. Basically, it's your revenues minus your expenses. Yes, in small business (without brainiac Accountants) we call this profits. When writing my personal ledger I never take into consideration interest, taxes, depreciation and amortization. If we earn $1000 a month and it costs us $500 a month to earn the $1000 in revenue then I consider it a $500 profit. In suit and tie world they would call this EBITDA. Of course they add some other jargon to the equation and most of the time larger Corporations have significantly more complex balance sheets. So to me, EBITDA means profits for large Corporations that have too much other equations to get an exact number.

So is it accurate to consider EBITDA as profit? It really depends on the situation. If you are considering purchasing a small company ($500,000 in revenue per year or less with no employees) then yes, you could likely call EBITDA profit as the two would be very close. My problem is that with large companies these two numbers could be quite different. Net income, or profit is an accurate figure on a balance sheet. I know a lot of companies don't like to disclose net income and more times than others a companies EBIDTA is larger than their net income. In some instances, it's substantially larger so why not report that number?

I've also heard of EBITDA referenced as cash flow. Once again, this is OK for smaller companies as these two numbers are likely to be very close but for larger companies there will be some discrepancies.

To conclude this mind-boggling piece, large companies like to mention EBITDA and often times you'll hear "xyz company was acquired for a 10 year multiple of EBITDA". This means that xyz company was acquired for an amount possibly close to 10 years of profits. For small companies the EBITDA would be very close to the actual profits or cash flows where large companies may have some discrepancies. Funny thing is that you never hear Joe Blow (owner of small-website.com) mentioning their EBITDA on ebay when trying to sell their business. Perhaps the best utilization of the term is for small business owners.