Why Normalized EBITDA is Important
Investopedia describes EBITDA this way:
EBITDA is essentially net income with interest, taxes, depreciation and amortization added back to it. EBITDA can be used to analyze and compare profitability among companies and industries as it eliminates the effects of financing and accounting decisions. EBITDA is often used in valuation ratios and compared to enterprise value and revenue.
In its simplest form, EBITDA is calculated in the following manner:
EBITDA = Operating Profit + Depreciation Expense + Amortization Expense
The more literal formula for EBITDA is:
EBITDA = Net Profit + Interest +Taxes + Depreciation + Amortization
However, there is more that needs to be factored in when determining an offer your company may expect to receive. These are typically add-backs that are not a “normal” or necessary part of running your business day to day.
For example: If the CEO salary is $500K and the typical industry salary is $300K you could expect roughly $200K to be added to EBITDA to normalize it.