What Is EBITDA: Formula, Definition, and History
EBITDA represents a formula calculated by taking the net income of a business and adding back interest payments, taxes, depreciation, and amortization. This helps compare the values of two businesses by removing expenses that can vary with individual account strategies. It can also allow prospective buyers to estimate expected cash flows upon purchasing a business.
For instance, a business financed with equity will have no interest payments, whereas a business financed with debt will have interest payments that are deducted from gross income. When a small business is sold, it is often as an asset purchase, meaning it is often transferred debt-free, so adding interest payments back into net income allows for the business to be more equally valued for a prospective buyer, lender, or investor.
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