EBITDA Calculator

What EBITDA actually measures

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It exists because net income includes things that depend on financing decisions (interest), tax structure (income taxes), and accounting estimates (depreciation and amortization) — and those things distort the underlying operating performance.

Strip them out, and you're left with a cleaner measure of how much cash the business generates from operations. That makes EBITDA the most-used cross-industry profitability comparator, and the standard input for valuation multiples, covenant calculations, and DSCR.

EBITDA isn't cash flow — it ignores working capital changes and capital expenditures. But for most owner-operator businesses, it's the closest single number to operating cash that doesn't require building a full cash flow statement.

The three formulas (all produce the same number)

From net income (textbook):
  EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

From operating income (fastest):
  EBITDA = Operating Income + Depreciation + Amortization

From P&L line items (when only line items are available):
  EBITDA = Revenue − COGS − Operating Expenses (excluding D&A)

All three should produce the same EBITDA for the same business in the same period. If they don't, the difference usually comes from how D&A is being separated from operating expenses — common error, easy to fix.

A worked example

Consider a small services company with the following annual P&L:

• Revenue: $1,200,000
• COGS: $480,000
• Operating expenses (including D&A): $480,000
• ...of which depreciation: $30,000
• ...of which amortization: $10,000
• Operating income: $240,000
• Interest expense: $20,000
• Income taxes: $44,000
• Net income: $176,000

All three modes:

Mode 1 (net income): $176K + $20K + $44K + $30K + $10K = $280K

Mode 2 (operating income): $240K + $30K + $10K = $280K

Mode 3 (P&L): $1,200K − $480K − ($480K − $30K − $10K) = $1,200K − $480K − $440K = $280K ✓

EBITDA margin: $280K ÷ $1,200K = 23.3%. For professional services, that's comfortably inside the healthy zone (12-30%).

Industry-specific zones

EBITDA margin varies dramatically by industry — comparing your margin to a generic "good is 15%" rule will mislead you in either direction:

• Professional services: typically 12-30%. Low capex, moderate opex.
• Construction and trades: typically 7-15%. WIP, retainage, and equipment depreciation pull the number down.
• Manufacturing: typically 8-18%. Wide variance — established mid-tier mfg runs 12-15%, commodity mfg below 8%, specialty mfg can exceed 20%.
• Retail: typically 4-10%. Famously thin — high inventory turn at low unit margin.
• Restaurants and food service: typically 5-12%. Single-unit operators usually 6-10%; multi-unit concepts can hit 12%+.
• E-commerce: typically 6-18%. Wide variance depending on category, scale, and customer acquisition economics.

Add-backs: the honest version

Adjusted EBITDA — EBITDA after "add-backs" for non-recurring items — is the number that gets discussed in valuation conversations. The principle is reasonable: a one-time legal settlement or an owner's above-market salary won't recur for a future buyer, so they shouldn't depress the number a buyer sees.

The principle gets abused. Aggressive add-backs include: discretionary travel; family members on payroll; personal vehicle, phone, and insurance; subscriptions to services the buyer wouldn't need; "owner's discretionary spending" in vague categories. Some of these can be legitimate. Most are negotiable. None of them survive detailed due diligence without supporting documentation.

The free version supports three add-backs:

1. Owner compensation above market. The EXCESS of owner salary over what a hired manager would cost. If you pay yourself $170K and would hire a GM at $120K, the add-back is $50K — not the entire $170K. Documenting this requires a defensible market-rate comparison.
2. One-time professional fees. Legal settlements, major accounting cleanups, system implementations. Recurring legal counsel is NOT a valid add-back; if your business is in litigation every year, that's an operating cost.
3. One-time restructuring or relocation costs. Genuinely non-recurring items — an office move, severance, a major operational overhaul.

Aggressive add-back analysis (the personal vehicle, the family-on-payroll, the "discretionary travel") is where the SDE calculator and the Toolkit go deeper. SDE — Seller's Discretionary Earnings — is the metric small business buyers actually use, and it includes the broader add-back conversation by design.

Common mistakes

1. Including D&A in operating expenses twice. The most common mistake. If your P&L mode opex includes D&A, you're subtracting it twice (once via opex, once not adding it back). The mode that asks for "opex EXCLUDING D&A" is deliberate — separate it cleanly.
2. Confusing EBITDA with cash flow. EBITDA ignores working capital changes (AR build-up, inventory growth, AP cycle) and capex. A growing business with healthy EBITDA can still run out of cash. Use EBITDA for profitability comparison, not cash management.
3. Comparing EBITDA to net income as if they're interchangeable. They aren't. EBITDA can be multiples larger than net income for businesses with high depreciation or interest. Stick with one for any given comparison.
4. Stacking add-backs without documentation. Every add-back will be scrutinized in any serious financial conversation — banker due diligence, M&A due diligence, audit. Add-backs without supporting detail get haircut to zero. Document each one with the underlying transaction detail.
5. Quoting EBITDA in absolute dollars when comparing to peers. EBITDA dollars scale with revenue. A $500K EBITDA is different in a $2M business than in a $20M business. Use EBITDA margin (EBITDA/revenue) for comparisons. The calculator computes both.

When EBITDA matters most

• DSCR (Debt Service Coverage Ratio). EBITDA is the numerator. Bankers calculate DSCR as EBITDA ÷ Annual Debt Service; healthy is typically 1.25x or above. Use the cross-link below to compute yours.
• Loan covenants. Most commercial loan agreements include EBITDA-based covenants (debt-to-EBITDA ratio, fixed-charge coverage, etc.). Track quarterly against covenant levels — surprise covenant breaches are avoidable.
• Valuation conversations. Business valuations for sale, partnership buy-outs, and equity financings all start with EBITDA × multiple. Multiples vary 3-10x depending on industry, growth, size, and customer concentration — but EBITDA is the common starting input.
• Cross-business comparisons. Comparing your margin to industry peers, or comparing two businesses you might acquire. EBITDA margin neutralizes the financing and tax differences that distort net income comparisons.

FAQ

What's the difference between EBITDA and operating income?

Operating income (EBIT) excludes interest and taxes but INCLUDES depreciation and amortization. EBITDA is operating income with D&A added back. For asset-heavy businesses (manufacturing, construction, restaurants), the gap can be substantial; for asset-light services, the two converge.

Is higher EBITDA always better?

For most owner-operators, yes — within reason. Extremely high EBITDA (40%+ in non-software businesses) sometimes indicates under-investment in capacity, talent, or equipment, which can show up later as growth constraints or deferred maintenance. But for the vast majority of small businesses, EBITDA improvement is genuine improvement.

What's the difference between EBITDA and SDE?

SDE — Seller's Discretionary Earnings — is EBITDA plus owner compensation plus owner perks. It's the standard metric for valuing small businesses (typically under $5M revenue) where the owner is also the operator. EBITDA is used at slightly larger sizes where the business is run by professional management. SDE is on the calculator roadmap but isn't built yet.

Does EBITDA include depreciation of inventory?

Inventory write-downs typically flow through COGS, not as depreciation. EBITDA excludes the "D&A" line of opex specifically. If you have unusual inventory treatment (write-downs, obsolescence reserves), those usually stay inside COGS and therefore inside EBITDA. When in doubt, your accountant's P&L is the source of truth — match their categories.

What's a typical EBITDA multiple for valuation?

Wide range — 3x to 10x is common for small businesses, depending on industry, growth, customer concentration, and recurring vs. project revenue. Healthcare and software businesses can multiply higher; commodity services and single-customer businesses lower. The calculator deliberately doesn't suggest a multiple — the right one depends on too many factors specific to your business. A broker, M&A advisor, or appraiser is the right source for a real range.