When it comes to buying, merging, or selling a business, financial due diligence is critical. This thorough analysis of a business’s financial health provides a comprehensive understanding of its economic standing, mitigating potential risks and ensuring a fair deal for both parties involved. One factor that plays a significant role in this evaluation is EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

EBITDA is a financial metric that assesses a company’s operating performance. It’s essentially the net income with interest, taxes, depreciation, and amortization added back. EBITDA is used to analyze and compare profitability among companies and industries as it eliminates the effects of financing and accounting decisions. In straightforward terms, it reflects the profitability of a business before the influence of non-operating factors.

The importance of EBITDA during financial due diligence cannot be overstated. It delivers a clear picture of a business’s operational profitability by focusing solely on earnings from its core business operations. This enables potential buyers or sellers to make a more informed and objective evaluation of a business’s performance and potential.

EBITDA is an excellent indicator of a company’s financial health, and here’s why. When a potential investor or buyer examines a business, they’re interested in its ability to generate profits. EBITDA provides a more accurate reflection of this, as it excludes non-operational costs and potential tax shields—these are factors that can vary between businesses and industries and can distort the true operational performance of a company.

By using EBITDA, buyers and sellers can compare businesses in the same industry, regardless of size. It allows them to benchmark against industry averages and competitors, providing a fairer and more effective measure for comparison.

It’s important to note that while EBITDA is a useful tool, it should not be the sole determinant in a business transaction. It’s a non-GAAP (Generally Accepted Accounting Principles) measure, which means it can be susceptible to manipulation. Therefore, it should be used in conjunction with other financial metrics and a comprehensive due diligence process to ensure a holistic understanding of a company’s financial health.

If you are planning on buying, merging, or selling a business, RBT CPAs professionals are available to conduct financial due diligence. To learn more about our services and approach, give us a call or send us a message. We would love to have the opportunity to show you how we can be Remarkably Better Together.

RBT CPAs never offshores work outside of the U.S., so you always know who is handling your financial information.