“What does EBITDA mean?” This is a common question we get from business owners.
The short answer is, EBITDA is an acronym which stands for: Earnings Before Interest Tax Depreciation and Amortization.
Adjusted EBITDA is just your EBITDA, adjusted for any expenses which a new owner could expect to eliminate (or pay) but after subtracting a market wage for the work the current owner(s) do in the business.
You may also hear the term PEBITDA (Proprietors Earnings before Interest, Tax,
Depreciation and Amortisation) this referrers to your Adjusted EBITDA without paying the current owners a wage for the work they do in the business. This is also referred to as the Owners Earnings.
Here’s some examples of typical adjustments:
If your business pays for your personal vehicle, but you aren’t active in the business day to day, the cost would be added back.
If the business operates out of a commercial property you own but isn’t paying rent, the market rate of rent would be deducted.
Now that we’ve got the technical definitions out of the way – why should you care?
Firstly, because adjusted EBITDA is a more accurate measure of the earnings power of your business.
Secondly, because adjusted EBITDA is possibly the single most important number in determining your business value and eventual sale price. Getting it wrong could be costly.
So, if it’s that important how do you calculate it?
Well lucky for you, we’ve built a calculator for exactly that purpose.
To begin, you’ll need a copy of your profit and loss statement. If you don’t have one handy, email your accountant and ask for them to email it to you.
P.S. If you don’t receive it soon don’t forget to check your spam folder.