Understanding EBITDA: What Lenders and Buyers Look For

Your profit might be lying to you. Not all profit tells the truth. In this episode, Paul breaks down EBITDA, a key number that banks, buyers, and investors use to evaluate your business. While your standard profit and loss includes expenses like interest, taxes, depreciation, and amortization, EBITDA strips those out to show what your business actually earns at its core. That matters if you’re thinking about selling, merging, or simply understanding how healthy your business really is. A company can look profitable on paper but still struggle with cash flow, debt, or owner withdrawals, and EBITDA helps highlight earning potential, not the full picture. Paul also shares real client examples to show how these adjustments play out and what buyers may look for beyond this number. Listen to the full episode to understand how EBITDA works and when you should actually use it.

EBITDA download: 

https://drive.google.com/drive/folders/1C_4Owq5WyWFsjIndVUAG_iXlQdY7AelN?usp=drive_link

Transcript

What is EBITDA?

Tax season 2025 is officially behind us, even though I have regular bookkeeping that won’t be totally caught up until the end of June, probably. But now, there’s less pressure to get it done. So, back to normal, I go.  

So, in this episode I will be introducing you to something in accounting that you might not know about at all.  And I’m talking to you bookkeepers and business owners both here --- Let’s talk about EBITDA.  (Commonly pronounced as “ee-bit-dah).  I’m Paul Rosenblum. 

I recently had a client ask me to do an EBITDA report for him since he is either going to try to sell his business or merge it with another.  It sounded somewhat familiar to me, but never really did one. I looked it up and remembered that I knew it by another name. Not an official name, but I had a client several years ago who wanted to possibly sell their business, and we copied the company file in QB Desktop and took away the soft expenses.  We showed the income of the company and the necessary expenses to run the company without any extras.  That’s the basic idea of EBITDA. 

EBITDA stands for: 

Earnings Before Interest, Taxes, Depreciation and amortization.   EBITDA. 

Even though depreciation, amortization, business taxes and interest are deductible for tax purposes, putting together a report for banks, investors, or potential buyers of your business, basically adds back those categories. Or they can be taken out of the report totally.  The profit of the company will go up in EBITDA reports for the purpose of looking at the profit of the company without the ‘extra’ tax deductions. 

Let’s go over each part of this acronym.

 E: Earnings:   Net profit (which is)- total revenue minus business expenses. 

B: Before: (the following)  

I: Interest: The interest on credit cards or loans that you pay is subtracted from the expenses shown on the EBITDA. 

D: Depreciation: When you purchase machinery, computers, IPads, vehicles that the business owns and they are entered into the accounting system as Fixed Assets, depreciation happens usually over a period of years. This depreciation is not shown in the EBITDA report. 

A: Amortization – Much like depreciation, but amortization is for intangible assets such as trademarks, patents or copyrights. Also, for start-up expenses for a new company. All amortization needs to be out of the EBITDA report as well. 

The EBITDA report will show the potential investor or bank the company’s ability to pay off debt. 

Since the EBITDA is a profit and loss report and doesn’t show the total snapshot of the company (meaning the balance sheet), it doesn’t show the total amount of debt that the company has, and it doesn’t show how the company uses incoming money (meaning distributions or draw to the owner(s). It shows income and expenses without showing interest, depreciation, business taxes, or amortization entries.  

I will put a link in the show notes to the  bookkeepermensch website to an EBITDA chart if you want to take a better look at it. 

I mentioned earlier that I had done something similar to EBITDA several years ago, before 2020, for a client who was thinking about selling his businesses and had a potentially interested buyer. He was using QuickBooks desktop at the time (now he’s using QBO).  He wanted more money than the potential buyer was willing to offer. He now has a second business that is somewhat related and the two businesses work together at times.  

With the desktop edition, I made a copy of the entire company and then took out what I called ‘soft expenses’. I took out the interest, depreciation, amortization, and business taxes. However, I also took out any business meals that were not ‘needed’ for the running of the company, even meals that were with potential or current clients. We took out some of the travel expenses which were not absolutely needed to run the company.  We ended up showing the full income of the company, and the 100% necessary expenses that the company incurred to keep the company going. We got rid of décor for the office, personal vehicle expenses and post office boxes, for example.  Again, what wasn’t shown was the balance sheet. 

 In this case, my client didn’t owe any money on loans or credit lines, and his credit cards were always paid in full when the statement came in.  So, he had no debt. I don’t think the potential buyers ever looked at or asked for the balance sheet.  I recall that my client wanted about 6 times the profit on an average year to sell the company and the potential buyers wanted to pay less. So, the deal was never made. It worked out for my client in the long run though.  

The client who asked for an EBITDA report had and has a very bad cash flow. He’s showing a decent profit, but that profit, rather than paying bills that the company owes, he took out as a ‘draw’ for himself. So, there are bills to pay for the business, little money in the bank because it had been taken out as an owners’ draw into his personal account. So, he might try and sell the company or merge with another, but it would be a tough sell because of a tremendous about of debt. I’d be surprised if the potentials buyers didn’t ask for a balance sheet.  The owners’ draw is right on there in plain sight. So, EBITDA isn’t an end-all or a perfect report. It’s part of the picture. If a company is sold, in many cases, the seller will inherit any debt that the company currently has, not the buyer. The buyer can either buy the company and make a deal for the debt by either including a portion on it or not at all, or the buyer can buy the client list and not the assets or liabilities of the company at all.  

Talking about that, when selling a company (LLC or corporation), the tax ID number has to change for the new owner, as well as all ownership paperwork. Most of the time, the new owner will start a new set of books, entering the ending balances of the entity that they just bought into a fresh set of books so they would start clean. There might be equipment not fully depreciated yet by the old company, for one example, that would have to be tracked in the new company.

 If an LLC is sold and the buyer wants it to be a corporation, then a new set of books has to be created, and everything will start fresh.  The new corporation would purchase assets from the old company at market value and then be able to depreciate them. 

I recently had a client with a corporation who closed that entity and started an LLC as a continuation of that company, but as a slightly different name.  That ‘conversion’ is still happening as I write this episode. 

So, EBITDA is just part of this whole process to look at the company closely and really see if it’s making money or not. It’s a good tool, but not the whole story.  

Just another tool in the BUB (Business Utility Belt) by the way. 

If you have any ideas for future episodes, please leave fan mail (Buzzsprout has upgraded that feature – now it has voicemail!) -- or email me at Bookkeepermensch@gmail.  I’d love to hear from you. And business owners – don’t be shy --- get into the conversation here by using the fan mail feature!  

UNT (that’s “Until Next Time”), I’m Paul Rosenblum