EBITDA

If there is one number that dominates every conversation in a company acquisition, it is EBITDA. It is the figure that appears in the first meeting with a potential buyer, the one used to calculate the valuation, and the one that largely determines how much the seller will receive. Yet many business owners do not know exactly what it measures — or, more importantly, what it does not measure.

What is EBITDA

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It is calculated by starting with operating profit and adding back non-cash charges:

EBITDA = Operating profit + Depreciation + Amortisation

Or alternatively, starting from net profit:

EBITDA = Net profit + Interest + Taxes + Depreciation + Amortisation

Why are these items removed? Because EBITDA aims to isolate the business’s ability to generate cash from operations, regardless of:

• How it is financed (interest depends on the debt structure, which the buyer will likely change).
• Its tax jurisdiction (taxes depend on the fiscal structure, which may also change).
• The age of its assets (depreciation and amortisation are accounting costs, not actual cash outflows).

This makes EBITDA a relatively comparable metric across companies of different sizes, sectors, and financing structures, which explains its popularity in the M&A world.

Why it matters in a transaction

EBITDA is the foundation on which valuations are built in the vast majority of mid-market transactions. The mechanism is straightforward:

Enterprise Value = EBITDA x Multiple

If a company has an EBITDA of 3 million euros and the applicable multiple is 6x, the enterprise value is 18 million. From there, adjustments are made for net financial debt and working capital to arrive at equity value (what the seller effectively receives).

This means any variation in EBITDA has a multiplied effect on the price. If EBITDA is 3.2 million instead of 3.0 million — a difference of 200,000 euros — at a 6x multiple, the valuation increases by 1.2 million. This is why the discussion about which EBITDA is the “correct” one (historical, normalised, pro-forma) is always the most intense negotiation in any transaction.

How it is calculated in practice

On paper, calculating EBITDA seems simple. In practice, the variations are enormous. These are the most common issues that arise during financial due diligence:

Extraordinary or non-recurring expenses. Was there litigation last year that generated 400,000 euros in legal costs? A facility relocation? A collective redundancy? These expenses distort EBITDA and must be analysed case by case.

Owner’s compensation. In family businesses, it is common for the owner to pay themselves a salary below (or above) market rate. EBITDA must be adjusted to reflect what it would cost to hire an equivalent professional manager.

Personal expenses charged to the company. The founder’s car, mixed-purpose travel, household utilities. These are standard adjustments that increase EBITDA.

Related-party leases. If the company operates in a property owned by the founder and pays below (or above) market rent, EBITDA must be adjusted to market rates.

IFRS 16 and leases. Current accounting standards capitalise certain leases, which affects the EBITDA calculation. It is essential to agree whether pre-IFRS 16 or post-IFRS 16 EBITDA is used.

A practical example

A transport and logistics company in southeastern Spain presents the following accounts for the latest fiscal year:

Item	Amount
Revenue	28,000,000 euros
Personnel costs	18,500,000 euros
Other operating expenses	5,200,000 euros
Depreciation and amortisation	1,800,000 euros
Operating profit	2,500,000 euros
EBITDA (= 2,500,000 + 1,800,000)	4,300,000 euros

However, due diligence reveals that within “Other operating expenses” there are 320,000 euros of the owner’s personal expenses (cars, personal travel, family insurance), and that the founder’s salary (included in personnel costs) is 120,000 euros below the market cost of a general manager.

The adjusted or normalised EBITDA would be:

4,300,000 + 320,000 (personal expenses) - 120,000 (salary adjustment) = 4,500,000 euros

At a 6x multiple, the difference between the declared and normalised EBITDA amounts to 1.2 million euros in the transaction price.

Limitations of EBITDA

EBITDA is a useful approximation, but not a perfect one. It has important limitations:

• It does not reflect investment needs. An industrial company that needs to replace its machinery every five years has capital expenditure (capex) requirements that EBITDA ignores. Two companies with the same EBITDA but different capex needs are worth very different amounts.
• It does not reflect working capital changes. A fast-growing company may have a high EBITDA but need increasing amounts of working capital to finance its operations, reducing actual available cash.
• It is not cash flow. EBITDA is a proxy for cash generation, but it is not actual free cash flow. For that, you need to subtract capex, working capital changes, and taxes.
• It can be manipulated. Within accepted accounting principles, there is room to present a more or less favourable EBITDA depending on how certain items are classified.

Frequently asked questions

Is EBITDA the same as cash flow?

No. EBITDA is an approximation of operating cash generation, but it does not account for capital expenditure on fixed assets (capex), changes in working capital, or taxes actually paid. Free cash flow is a more precise metric but more complex to calculate, which is why EBITDA is used as a quick reference in the early stages of a transaction.

What EBITDA multiple applies in the Spanish mid-market?

It depends enormously on the sector, size, growth, and quality of the business. As a general reference, Spanish mid-market transactions typically range from 4x to 8x EBITDA. Sectors with high growth or recurring revenues (technology, subscription services) can reach multiples of 10x or higher. Mature or cyclical sectors (construction, commodity distribution) tend to fall in the lower range.

Does the buyer always try to lower the EBITDA and the seller to raise it?

Yes, it is a natural dynamic. The seller has incentives to argue that their normalised EBITDA is higher (more positive adjustments), while the buyer will seek to challenge those adjustments or add negative ones. This is why it is essential for both parties to work with independent financial advisors and for all adjustments to be documented and justified. The real battlefield is not whether EBITDA is high or low, but which adjustments are reasonable.

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