EBITDA: What It Means for Business Buyers

What Is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.

The formula is straightforward: start with net income, then add back interest expense, income taxes, depreciation, and amortization. What you are left with is a proxy for the operating cash flow a business generates before financing and accounting decisions distort the picture.

Here is why those add-backs matter.

Interest expense reflects how the current owner chose to finance the business, not how you will. Taxes depend on entity structure, which changes at closing. Depreciation and amortization are non-cash accounting entries, not real cash leaving the business.

By stripping all four out, EBITDA gives you a clean, comparable number: what does this business actually earn from its operations?

How does EBITDA differ from net income and SDE?

Net income is the bottom line after everything, including interest payments on the owner's existing debt, their specific tax rate, and accounting decisions that vary by accountant. Two identical businesses can have completely different net incomes. Net income is nearly useless for comparing acquisition targets.

SDE (Seller's Discretionary Earnings) goes one step further than EBITDA: it also adds back the owner's full compensation. The logic is that a sole owner-operator captures all the profit personally, so you add their salary back to show total economic benefit.

SDE is common in small business brokerage. It is also routinely inflated.

Brokers present SDE because it produces the highest number. A business paying its owner $200K per year looks a lot better on an SDE basis than an EBITDA basis, even though a buyer replacing that owner with a manager will spend that $200K on salary.

SBA lenders and Regalis Capital underwrite to EBITDA, not SDE. If a seller shows you SDE, apply a 15% to 50% discount before running any deal math. The exact adjustment depends on how much of the SDE is owner compensation versus true excess earnings.

How do you calculate EBITDA? (worked example)

Take a business with $1.5M in annual revenue. Here is how the EBITDA calculation works from the income statement down.

EBITDA in this example is $350,000. Net income is $196,000. The $154,000 gap is not a discrepancy. It is the result of interest, taxes, and non-cash charges that a new buyer will experience differently.

As of Q1 2026, a business with $350,000 in EBITDA trading at 4x would price at $1.4M. At 3x, it is $1.05M. At 5x, it is $1.75M. That range is the SBA acquisition sweet spot.

What is adjusted EBITDA, and which add-backs are legitimate?

Raw EBITDA is a starting point. Adjusted EBITDA removes non-recurring expenses that inflated costs in a given year.

Common add-backs include: one-time legal fees, a major equipment repair that will not recur, above-market owner compensation, personal expenses run through the business (a car, a phone plan), and one-time marketing spend.

Each add-back must be documented and defensible. If a seller wants to add back $80,000 in "one-time" consulting fees that have appeared every year for three years, that is not a legitimate add-back.

Based on Regalis Capital's analysis of recent acquisitions, buyers who accept undocumented add-backs without verification are among the most common sources of post-close surprises. Every add-back should come with a corresponding receipt, contract, or tax filing to back it up.

The gap between a seller's claimed EBITDA and the verified adjusted EBITDA is where deals get repriced or killed.

How EBITDA Multiples Work in SBA Acquisitions

Once you have a verified EBITDA number, valuation is straightforward: multiply it by the industry-appropriate multiple.

A 4x multiple on $350,000 EBITDA gives you a $1.4M acquisition price. That price then gets run through SBA deal math.

These are rough estimates based on market data. Actual terms depend on individual qualification and lender.

The SBA sweet spot for EBITDA multiples is 3x to 5x. Below 3x is an excellent deal if the EBITDA is real. Above 5x requires a more carefully structured deal: a larger seller note, a partial earnout tied to performance, or a demonstrably strong reason the premium is justified.

The DSCR calculation above uses EBITDA as the numerator (cash available for debt service) divided by annual debt service. Because the 5% seller note is on full standby, only the SBA loan payment hits debt service. A lender will recast that numerator lower before underwriting, deducting a market-rate replacement manager salary so the ratio reflects cash flow after paying someone to run the business. Confirm the deal still clears the threshold on that recast figure rather than on raw EBITDA. At 1.71x, this deal clears the Regalis 1.5x floor. The SBA global floor is 1.15x and most lenders overlay around 1.25x as their minimum, while we target a stronger 1.5x floor with 2.0x as the goal.

Why do SBA lenders underwrite to EBITDA?

SBA lenders underwrite to EBITDA because it standardizes cash flow across businesses with different capital structures, tax situations, and accounting methods.

When a lender is deciding whether to approve a $1.1M loan, they need to know whether the business generates enough cash to service that debt. EBITDA, adjusted for owner compensation at market rates, gives them that number in a consistent format.

If you walk into an SBA lender with SDE numbers instead of EBITDA, expect the underwriter to recast the financials themselves. They will use their own EBITDA figure, which may be lower than what the broker presented.

Running your own EBITDA calculation before a lender does is one of the most basic pieces of due diligence a buyer should perform. If your number and the lender's number diverge significantly, find out why before you are under contract.

Related Terms

Understanding EBITDA is one piece of the acquisition valuation framework. These terms complete the picture:

• SDE (Seller's Discretionary Earnings)
• Valuation Multiples
• DSCR (Debt Service Coverage Ratio)

Frequently Asked Questions

What is the difference between EBITDA and SDE?

EBITDA adds back interest, taxes, depreciation, and amortization to net income. SDE goes further and adds back the owner's full compensation on top of EBITDA. SDE is common in small business brokerage but produces an inflated number. SBA lenders underwrite to EBITDA, typically applying a market-rate management salary before calculating cash available for debt service.

What EBITDA multiple should I expect to pay for an SBA acquisition?

As of Q1 2026, most SBA acquisitions close between 3x and 5x EBITDA. Below 3x is a strong deal if the EBITDA is verified. Above 5x requires additional deal structure to protect the buyer, such as a larger seller note or an earnout. The right multiple depends on industry, growth trajectory, customer concentration, and owner dependency.

Can a seller adjust EBITDA to make the business look more profitable?

Yes, and this is common. Sellers and brokers present "adjusted EBITDA" that adds back one-time expenses to show a higher number. Some add-backs are legitimate, such as a non-recurring legal settlement. Others are not, such as recurring consulting fees labeled as one-time. Every add-back should be verified with documentation. According to Regalis Capital's deal team, unverified add-backs are one of the top sources of post-close valuation disputes.

Talk to Regalis Capital About Your Acquisition Target

If you are evaluating a business and trying to verify whether the seller's EBITDA numbers hold up, that is exactly the kind of work our deal team does before a letter of intent is ever submitted.

We review upwards of 20,000 deals a month and underwrite to verified EBITDA before advising a client to move forward. If the numbers do not work at a real EBITDA basis, we say so.

Run your deal through Regalis Capital's acquisition framework.