AFO · Glossary
EBITDA
Earnings before interest, taxes, depreciation, and amortization — the standard proxy for a business's underlying cash-generating capacity.
What this term means in practice
EBITDA is earnings before interest, taxes, depreciation, and amortization. It's an imperfect but standard proxy for a business's underlying cash-generating capacity — strips out the financing decision (interest), the tax structure, and the non-cash accounting charges to focus on operating performance.
Lenders and buyers don't underwrite reported EBITDA; they underwrite normalized EBITDA. Normalization adjusts for one-time items (a lawsuit settlement, an asset sale), non-recurring items (a Covid grant, an insurance recovery), and owner-related items (above-market owner compensation, related-party rent, personal expenses paid through the business). The normalized number can differ from the reported number by 20% or more on owner-operator businesses.
The CPA's normalization workbook is part of every credible lender or buyer package. The discipline of documenting each adjustment — what was added back, what was removed, with the supporting calculation — is what lets the lender's credit committee or the buyer's diligence team accept the normalization rather than challenge it.
Where the definition meets your situation.
The CPA can walk through how this concept applies to your business in twenty minutes — what providers will ask, where the negotiation matters, what the trade-offs actually look like in your numbers.