Is EBITDA Misleading When Selling Your Business?

By: Keith Olson, Williston Center Director

When business owners start thinking about selling, one number often takes center stage: EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization. It is widely viewed as a shortcut to determining what a business is worth. But relying too heavily on EBITDA can leave business owners surprised when buyers or lenders push back on value. If you want your business to sell at its true worth, it is critical to understand what EBITDA does not tell you. Here are eight reasons why EBITDA alone can paint an incomplete and sometimes misleading picture.

1. Taxes Can Take a Big Chunk Out of Earnings

EBITDA doesn’t factor in taxes, which can drastically reduce actual earnings. While some businesses avoid taxes, this doesn’t always make them a good investment. Buyers or banks might wonder, “What else is being hidden?” If taxes aren’t considered in profitability, the company’s true earnings could be inflated, making it harder to secure financing.

2. Manipulation Risk

Because EBITDA is not regulated by accounting standards (GAAP), it can be easily manipulated. Many companies don’t have audited financials, and with QuickBooks or similar systems, figures can be distorted to show higher earnings than reality. Less than 5% of companies use audited or compiled financials, leading to potential misrepresentation.

3. Ignores Depreciation & Amortization

Depreciation and amortization (D&A) are important because they reflect the ongoing investment needed to maintain or replace assets. Ignoring D&A could make the business look more profitable than it really is, but what happens when key equipment or property needs to be replaced? The business may not have the cash flow to sustain these investments, lowering its long-term value.

4. Non-Operating Costs Matter

Many non-operating costs are overlooked in EBITDA, such as interest expenses, inventory write-downs, and one-time costs. These costs can recur and have a significant impact on profitability. If a business doesn’t account for them, it may appear healthier than it truly is, and buyers could be misled about the company’s stability.

5. Interest and Leverage

A company might have a strong EBITDA, but if it’s highly leveraged (carrying a lot of debt), the interest payments can eat into profits. Failing to account for interest in EBITDA can make the business seem more profitable than it is. If the company is just paying interest without reducing debt, this signals a risky investment for buyers.

6. EBITDA is Not Cash

One of the biggest issues with EBITDA is that it’s not cash flow. EBITDA doesn’t show how much cash is left after principal loan payments, which are essential for the company’s ongoing operations. Even if a business appears profitable on paper, if it can’t generate enough cash to cover debts and expenses, it will struggle to survive, and this could deter buyers.

7. Different Calculations Can Mislead

Since EBITDA isn’t standardized by GAAP, businesses can calculate it in different ways. Without a consistent methodology, there’s no guarantee that the EBITDA figure accurately reflects the company’s financial health. Buyers need to ask detailed questions about how EBITDA was calculated to avoid being misled.

8. Requires Peer Comparison

EBITDA means very little unless it’s analyzed alongside other financial ratios and compared to industry peers. Without benchmarking the company against its competition, it’s impossible to tell if the business is a top performer or falling behind. EBITDA is only one piece of the puzzle, and relying on it alone won’t give you the full picture.

The Bottom Line: Don’t Rely on EBITDA Alone

EBITDA can be a useful metric, but it should never be the only one used when preparing to sell a business. It can be manipulated, ignores key expenses like taxes and interest, and does not reflect true cash flow. Business owners are best served by taking a comprehensive look at their financial health well before going to market. Small Business Development Centers are here to help business owners understand their numbers, identify value drivers, and prepare for a successful transition or sale. Working with an advisor early can help ensure your business is positioned accurately and competitively when the time comes to sell.