EBITDA has become the dominant M&A metric, but using it without judgement can lead to serious valuation errors. We analyse its real usefulness and most frequent traps in the middle market.
EBITDA has become the universal metric of M&A. Companies are valued as “X times EBITDA.” Advisers speak of “EBITDA multiples.” Entrepreneurs considering a sale ask “how many times EBITDA can I get?” Yet EBITDA has serious limitations that, in the Spanish middle market, can lead to significant valuation errors.
EBITDA eliminates factors that distort comparability: interest (allowing comparison across different leverage levels), taxes (neutralising fiscal differences), and depreciation/amortisation (approximating operating cash flow). These exclusions make it a useful proxy for a company’s cash generation capacity.
The depreciation trap. Excluding depreciation makes sense if the company needs no investment to maintain productive capacity. But in transport, industry, and hospitality, maintenance CAPEX is unavoidable. If we value these companies on EBITDA without considering maintenance CAPEX, we overstate free cash flow by 20-40%.
SME EBITDA is not comparable. Multiples circulating in the market are based on larger transactions. Applying them to a company with 1-2 million EBITDA is a common error. Smaller companies deserve lower multiples due to greater risk, lower liquidity, and higher vulnerability.
The adjustments that change everything. Reported EBITDA in a family SME rarely equals the buyer’s normalised EBITDA. Adjustments for founder remuneration, personal expenses, related-party rents, and deferred investments can change the figure by 30% or more.
EBITDA should be complemented with: free cash flow (EBITDA minus maintenance CAPEX, minus working capital changes, minus taxes), recurring EBITDA (excluding non-repeatable items), contribution margin by client (especially in services), and ROIC (return on invested capital, measuring how efficiently capital is deployed).
For the entrepreneur preparing to sell: know your adjusted EBITDA — not the one in the income statement, but the one a buyer will calculate. For the buyer: never buy based solely on EBITDA. Look at free cash flow, revenue quality, investment needs, and concentration risks.
Dirk Manuel Martens Jimenez Founder, Blue Mountain Capital
By Dirk Manuel Martens Jiménez
By Dirk Manuel Martens Jiménez
By Dirk Manuel Martens Jiménez
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