EBITDA

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is the most commonly used earnings metric for valuing small and mid-market businesses in Canada, because it approximates the cash flow the business generates from operations before financing costs and non-cash accounting charges.

EBITDA is calculated by starting with net income and adding back interest expense, income tax expense, depreciation, and amortization. For business sale purposes, normalized EBITDA goes further — it also removes owner-specific expenses, one-time costs, and non-recurring items to reflect the sustainable earnings available to a new, unrelated owner.

Business valuations in the Canadian small and mid-market typically multiply normalized EBITDA by an industry-specific multiple (typically 3x–8x depending on sector, size, and growth characteristics) to arrive at enterprise value. Businesses with EBITDA below $500,000 are often valued on Seller's Discretionary Earnings (SDE) rather than EBITDA.

See also: SDE, Normalized EBITDA, Add-Back, EBITDA Multiple, Enterprise Value.