Your accountant has sent this year’s accounts. Profit is up, the tax bill is manageable, and you have started to wonder what the business would fetch if you sold it. The first number a buyer or lender will ask for is not in those accounts. It is EBITDA, usually in a version adjusted for the way you run the business.
This article makes one argument. The price of your business is set by the EBITDA figure a buyer accepts after due diligence, not the one in your accounts or on your own spreadsheet. The gap between the two is where most value is won or lost. Below, we explain how EBITDA is calculated, how buyers adjust it and how it becomes a price, as part of our guide on how to value a business.
What EBITDA means, in plain English
EBITDA stands for earnings before interest, tax, depreciation and amortisation. Each letter removes a cost that says more about how a business is financed, taxed or accounted for than about how well it trades.
Earnings means profit. Interest is the cost of borrowing, which reflects how the owner chose to fund the company. Tax depends on structure, reliefs and timing. Depreciation spreads the cost of physical assets such as vans and machinery over their working lives, and amortisation does the same for intangible assets such as software or purchased goodwill. Neither is a cash payment in the year it is charged.
Remove those four items and what remains is a rough proxy for operating cash profit: what the trade generates before funding choices, tax and the spreading of past investment. That is why buyers use it to compare businesses with different debts and owners on the same footing.
The measure is not new. The British Business Bank’s guide to EBITDA traces its popularity to the leveraged buyout boom of the 1980s, when it served as a test of whether a restructured business could meet the interest on its new debt. The same guide notes that banks will likely use EBITDA today to judge whether a business can repay what it borrows.
How to calculate EBITDA
There are two routes to the same answer. The first starts at the bottom of the profit and loss account: EBITDA equals profit for the financial year plus tax, interest, depreciation and amortisation. The second starts at operating profit, sometimes called EBIT because it is already stated before interest and tax: EBITDA equals operating profit plus depreciation and amortisation.
Take a fictional company, Hartley Joinery Ltd, a manufacturer with turnover of 2.4 million GBP. Its figures, set out as they appear in FRS 102 accounts, are below.
| Line item | GBP | Where to find it |
|---|---|---|
| Turnover | 2,400,000 | Profit and loss account |
| Cost of sales | (1,440,000) | Profit and loss account |
| Gross profit | 960,000 | Profit and loss account |
| Administrative expenses | (700,000) | Profit and loss account |
| Operating profit | 260,000 | Profit and loss account, where shown |
| Interest payable and similar expenses | (20,000) | Profit and loss account |
| Profit before taxation | 240,000 | Profit and loss account |
| Tax on profit | (58,000) | Profit and loss account and tax note |
| Profit for the financial year | 182,000 | Profit and loss account |
| Depreciation charged in the year | 60,000 | Tangible fixed assets note |
| Amortisation charged in the year | 10,000 | Intangible assets note |
| EBITDA | 330,000 | Calculated, not reported |
Working upwards, 182,000 GBP of profit plus 58,000 GBP of tax, 20,000 GBP of interest, 60,000 GBP of depreciation and 10,000 GBP of amortisation gives EBITDA of 330,000 GBP. Working from operating profit, 260,000 GBP plus 60,000 GBP and 10,000 GBP gives the same 330,000 GBP. If the routes disagree, something has been missed, often interest receivable or an item shown below operating profit.
Depreciation and amortisation rarely have their own lines. They sit inside cost of sales or administrative expenses, so take the charge for the year from the tangible fixed assets note and the intangible assets note. Some small companies do not show operating profit as a subtotal; in that case, start from profit before taxation and add back interest payable, less any interest receivable.
Why EBITDA is not in your statutory accounts
EBITDA is not a line in your statutory accounts. The Financial Reporting Council treats measures of this kind as alternative performance measures, meaning figures a company chooses to present alongside the results its reporting framework requires. Its October 2021 review of UK listed companies found that profit-based measures of this kind tended to look more favourable than the statutory numbers. If that happens in audited listed accounts, expect a buyer to test yours.
For many owner-managed companies the public record says even less. GOV.UK guidance on micro-entity accounts explains that a company meeting two of three tests, namely turnover of 1 million GBP or less, a balance sheet of 500,000 GBP or less and 10 employees or less, can send Companies House only its balance sheet. A buyer searching the register may find no profit figure at all.
That is changing slowly. Companies House confirmed on 9 June 2026 that from April 2028 small companies and micro-entities must file a profit and loss account, although they can opt out of publishing it. Either way, a buyer will ask for full accounts, management accounts and tax computations. EBITDA is a figure you build and defend, not one you are handed.
Adjusted or normalised EBITDA: the figure buyers actually use
Reported EBITDA shows how the business performed under your ownership. A buyer wants to know how it will perform under theirs. Adjusted, or normalised, EBITDA bridges the two by removing costs that will stop and adding costs that will start. The adjustments are called add-backs, although some take money away.
The most common are:
- An owner’s salary above or below the cost of a replacement manager, since a buyer will price in a market rate either way.
- Personal expenses run through the business, such as a family car or private travel, which stop on sale.
- One-off legal, restructuring or recruitment costs that will not recur.
- Family members on the payroll whose pay does not match the work they do.
- Rent paid to an owner who owns the premises, adjusted to what an unconnected landlord would charge.
Hartley Joinery’s owner pays himself a salary of 30,000 GBP and takes the rest as dividends. A general manager would cost about 75,000 GBP including employer costs. The company pays him 30,000 GBP a year in rent for premises that would let for 45,000 GBP on the open market. Here is his schedule of add-backs beside the figure agreed after due diligence.
| Adjustment | Seller’s schedule (GBP) | Agreed after due diligence (GBP) |
|---|---|---|
| Reported EBITDA | 330,000 | 330,000 |
| Owner’s salary to market rate | 0 | (45,000) |
| Personal expenses | 18,000 | 12,000 |
| One-off legal costs | 25,000 | 25,000 |
| Spouse on payroll | 22,000 | 10,000 |
| Rent to market level | 0 | (15,000) |
| Adjusted EBITDA | 395,000 | 317,000 |
The legal costs survived because invoices and a settlement letter showed a single dispute, now closed. Only 12,000 GBP of the personal spending had receipts that were clearly private. The owner’s wife keeps the books two days a week, work worth about 12,000 GBP, so only 10,000 GBP of her 22,000 GBP salary was added back. He had left out salary and rent, which a buyer must pay at market rates.
The gap is 78,000 GBP of EBITDA. At a multiple of four times, used here only to show the arithmetic, that is 312,000 GBP of price.
In our experience, the add-backs buyers reject most often are recurring one-offs: restructuring or recruitment costs that appear, under different names, in most years. Close behind is personal spending with no paper trail. A buyer’s accountant will ask for invoices, contracts and payroll records for every adjustment. Anything unproven is removed, and a schedule padded with weak items casts doubt on the strong ones.
If you are buying, treat every add-back as a claim to be proved; our advice for business buyers covers what to request.
EBITDA, SDE and net profit: which one applies to your business
Adjusted EBITDA assumes a business with management in place, bought by someone who will not run it day to day. Most UK businesses are not like that. According to the Department for Business and Trade’s Business Population Estimates 2025, 5.64 million of the 5.7 million private sector businesses at the start of 2025 had fewer than 50 employees, and three quarters employed no one besides their owners. Of the 1.4 million that did employ staff, about 1.15 million had between one and nine employees.
In a business of that size the buyer usually steps into the owner’s role. Seller’s discretionary earnings, or SDE, is then the better measure. It starts from EBITDA and adds back one working owner’s full pay and benefits, because the buyer will take that income in place of a manager’s salary. In our experience, adjusted net profit, struck after depreciation, is also common for small retail, hospitality and service businesses.
The test is who will run the business after completion. If the buyer will, SDE or adjusted net profit usually applies; if a manager will, adjusted EBITDA is the norm. Our guide to business valuation methods explains how these measures sit alongside asset-based and cash flow approaches, including discounted cash flow method.
How EBITDA turns into a valuation
Most EBITDA valuations multiply adjusted EBITDA by a figure that reflects risk and growth prospects. No government body publishes these multiples, and none should be read as data. In our experience, established owner-managed UK businesses with adjusted EBITDA in the low hundreds of thousands often change hands at roughly three to five times that figure. Sector, size, risk and deal terms move that range significantly in both directions.
Within any range, these factors decide where a business lands:
- Owner dependency: if customers deal only with you, part of the value leaves when you do.
- Customer concentration: one customer providing a large share of sales is a risk the buyer will price.
- Recurring revenue: contracted or repeat income is worth more than one-off work.
- Management depth: a team that can run the business without you supports a higher multiple.
- Sector: some sectors attract more buyers and lenders than others.
- Growth trend: three years of steady growth earn more than one strong year.
- Quality of records: clean monthly accounts shorten due diligence and reduce the discount for doubt.
The multiple produces enterprise value, the value of the business on a debt-free, cash-free basis. It is not what reaches your bank account. On a share sale the buyer deducts debt, adds surplus cash and adjusts for working capital against a normal level agreed at the outset. If Hartley Joinery sold at four times its agreed EBITDA, enterprise value would be 1,268,000 GBP. With 150,000 GBP of bank debt and 80,000 GBP of surplus cash, the equity price would be 1,198,000 GBP before any working capital adjustment.
On an asset sale the buyer takes the trade and chosen assets, while debts and cash stay in your company, and extracting the proceeds raises separate tax questions. For a fuller view of pricing, see how much is your business worth.
The limits of EBITDA
EBITDA is useful because it leaves things out. That is also its weakness.
Depreciation reflects real reinvestment. Machinery and vans wear out and must be replaced, and GOV.UK’s capital allowances guidance shows the scale the tax system allows for: up to 1 million GBP a year of qualifying plant and machinery can be deducted through the Annual Investment Allowance. A buyer of Hartley Joinery will ask what its 60,000 GBP of annual depreciation will cost to replace. EBITDA also ignores working capital: a growing business ties cash up in stock and customer debts.
Tax and debt are real cash too. GOV.UK’s Corporation Tax rates page currently sets a main rate of 25 per cent on profits over 250,000 GBP and a small profits rate of 19 per cent on profits of 50,000 GBP or less, with Marginal Relief between. Lenders use EBITDA as a starting point for debt capacity, and the cost of that debt is influenced by the Bank Rate set by the Bank of England.
Leases can flatter the figure. The FRC’s 2024 amendments to FRS 102 bring most leases onto the balance sheet for accounting periods beginning on or after 1 January 2026. Rent that used to reduce EBITDA is now charged as depreciation and interest, which EBITDA ignores. The business is unchanged, yet EBITDA rises, and a careful buyer will reverse the effect.
How to improve your EBITDA before you sell
Buyers pay for evidence, so the work starts 12 to 24 months before a sale. Stop running personal costs through the company. Move your own salary and any family pay towards market rates, and put a formal lease at market rent in place if you own the premises. Build a second tier of management and write down what you do each week. Move key customers onto written contracts, and reduce reliance on the largest.
Above all, keep monthly management accounts that reconcile to the year-end figures, with a running file of genuine one-off costs and their invoices. We regularly see sellers lose value not because profits were weak but because their records could not prove them. Our guide on how to sell a business sets these steps within the wider sale timetable.
The tax on the sale itself sits outside EBITDA. Business Asset Disposal Relief cuts Capital Gains Tax on qualifying disposals to 18 per cent from 6 April 2026, up from 14 per cent between 6 April 2025 and 5 April 2026. HMRC’s HS275 helpsheet confirms a lifetime limit of 1 million GBP of qualifying gains. The conditions are strict, so speak to your accountant before you agree terms.
Frequently asked questions
Is a higher EBITDA always better?
Not on its own. A higher figure helps only if a buyer believes it will last. EBITDA lifted by deferred maintenance or one unusually large contract can reduce confidence rather than add value. Buyers weigh the quality and trend of EBITDA as heavily as its size.
What is a good EBITDA margin?
It depends on the sector. EBITDA margin is EBITDA divided by turnover, so Hartley Joinery’s reported margin is 13.75 per cent. A labour-heavy service firm and a software business will sit in very different ranges. Compare your margin with your own trading history and close competitors, not a universal benchmark.
Does EBITDA include the owner’s salary?
Yes, as a cost. Reported EBITDA is struck after whatever salary the owner takes, which may be low if most income comes as dividends. Adjusted EBITDA replaces it with a market-rate manager’s cost. Seller’s discretionary earnings goes further and adds back one owner’s full pay and benefits.
Can a loss-making business have a positive EBITDA?
Yes. A company with heavy depreciation, amortisation or interest charges can report a loss while producing positive EBITDA. That shows the trade generates cash before financing and investment. It does not show the business is healthy, because those assets still need replacing and that debt still needs repaying.
Do banks use EBITDA to decide on a business loan?
Usually, as one input. The British Business Bank explains that a debt to EBITDA ratio shows how comfortably a company could clear its borrowings. Lenders also consider security, trading history, forecasts and the owner’s track record, so strong EBITDA does not guarantee approval.
What EBITDA multiple will my business sell for?
No one can say without seeing your figures, and no official body publishes multiples. In our experience the range for established owner-managed businesses is wide, and sector, size, risk, owner dependency and deal terms move it significantly. A valuation built on your adjusted EBITDA is the only reliable starting point.
The number that matters
Your statutory accounts record what happened. A buyer pays for what they believe will happen next, and the EBITDA figure they accept after due diligence is the one that sets your price. Building and evidencing that figure before a buyer tests it is the most valuable preparation you can do.
You can read more about how we sell businesses for owners across the UK. If you would like to know what your adjusted EBITDA points to today, request a free, confidential valuation and one of our team will talk it through with you.
Author – John P. Gaskell
John is a senior member of the Blacks Brokers team with extensive experience leading successful national sales operations. He plays a central role in developing the team’s approach to client service, drawing on a deep belief that positivity, care and drive are the defining qualities of any great salesperson. John delivers comprehensive training across the organisation that instils a client-first ethos at every level, ensuring consistency of service throughout every transaction. His focus is always on achieving the best possible outcome for each client the business serves.
