Why EBITDA Is Not Always the Best Measure of Value
- Tony Vaughan
- Jan 22
- 3 min read
EBITDA is one of the most commonly quoted figures in business valuation. It appears in broker marketing, Heads of Terms, and boardroom discussions. For many owners, it becomes the headline number they focus on when thinking about value.
The problem is simple. EBITDA is useful, but it is not definitive. In many cases, it is not even the most important measure. Relying on EBITDA alone can lead to unrealistic expectations, poor decision making, and disappointment when real buyers enter the process.
What EBITDA actually tells you
EBITDA strips out interest, tax, depreciation, and amortisation to give a view of operating profitability before financing and accounting treatments. In theory, it allows buyers to compare businesses on a like for like basis. In practice, it only tells part of the story. EBITDA shows profitability before costs that are often very real and unavoidable.
EBITDA ignores cash reality
Value is driven by cash, not accounting profit. Two businesses with identical EBITDA figures can have very different cash outcomes. One may convert profit into cash reliably. The other may consume cash through working capital, stock, or deferred debtor payments. Buyers pay close attention to:
Working capital requirements
Stock levels and stock turn
Debtor quality and payment terms
Capital expenditure needs
A business with strong EBITDA but weak cash conversion will be discounted heavily, regardless of the headline multiple.
Capital expenditure still matters
EBITDA removes depreciation, but depreciation exists for a reason. If a business requires ongoing investment in plant, equipment, vehicles, or technology, that cost does not disappear just because it is excluded from EBITDA. Buyers will assess:
The age and condition of assets
The level of ongoing capital investment required
Whether expenditure can realistically be deferred
Where capital intensity is high, EBITDA becomes a blunt and often misleading measure.
EBITDA can be flattered by adjustments
Owner managed businesses often present adjusted EBITDA figures to reflect a normalised position. Some adjustments are valid. Others are optimistic at best. Buyers will scrutinise adjustments closely, particularly those relating to:
Directors’ remuneration
One off costs that appear regularly
Personal expenses run through the business
Management time that will need replacing post sale
If EBITDA relies heavily on judgement calls, buyers will price risk into the deal.
Risk and dependency reduce relevance
EBITDA takes no account of risk. A business heavily dependent on one customer, one supplier, or one key individual may show strong EBITDA but still carry significant commercial risk. Buyers value sustainability, not just profitability. Concentration risk, customer churn, and management dependency all impact value, regardless of EBITDA.
Different buyers value businesses differently
Not all buyers are financial buyers chasing multiples. Trade buyers often value synergies, market access, contracts, or strategic fit more highly than EBITDA alone. Private buyers may focus on cash extraction. Employee ownership transitions focus on sustainable future profits and affordability. The same EBITDA figure can produce very different valuations depending on buyer type and deal structure.
EBITDA is a starting point, not a conclusion
EBITDA has its place. It provides a useful benchmark and a starting point for discussion.
It does not, on its own, define what a business is worth. A proper business valuation considers:
Cash generation
Balance sheet strength
Risk profile
Growth sustainability
Buyer appetite and deal structure
Ultimately, a business is worth what a buyer is prepared to pay, not what a multiple of EBITDA suggests.
Get a valuation grounded in reality
If you are planning a sale, succession, or exit strategy, understanding the real drivers of value matters. Over reliance on EBITDA often leads to misaligned expectations and weaker outcomes. BusinessValuation.co.uk provides practical, pre exit valuations grounded in how buyers actually think and transact.
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