WTF is EBITDA, and why does it matter?

Not all finance conversations are created equal. Some lean heavily on jargon. Others actually help you run a better business. My chat with Ciarán O’Donnell definitely falls into the second camp.

Ciarán is a fractional CFO and founder of Own Your Numbers, where he helps early-stage startups cut through complexity and build financial systems that actually support growth. In this episode of The New F*Word, we unpack a metric everyone’s heard of, but few truly understand: EBITDA.

Why do investors care about it? What does it show that Net Profit doesn’t? And how can thinking in EBITDA terms help you prepare for a future exit?

If you’ve ever wanted to feel more confident around investor conversations or just get a clearer handle on how your business is really performing, this episode is for you.

OK, but what’s wrong with Net Profit?

Net Profit is the bottom line of your Profit & Loss. Whilst you are most likely to be focused and concerned about your own business, others, including investors, will want to compare and contrast the profitability of one business to another.

Cast one eye on a future possible exit, businesses are often valued as a multiple of EBITDA. So that should be something to get you to know and grow your EBITDA.

The “before” means certain things are stripped out to see a profit performance that excludes interest, tax, depreciation and amortisation.

The "before" also means that, for most businesses, their EBITDA will typically show higher profits (or lower losses) than their Net Profit. When the number looks better, people naturally start paying more attention to it.

By stating your earnings or profits in this way, as well as being focused on it, you start to think like an investor and understand the importance placed on it when presenting to investors or a potential acquirer. Because when investors or buyers look at your business, they’re not just interested in post-tax profit; they want a clear picture of performance. EBITDA gives them that: a cleaner, more comparable view that shows how efficiently you run the business, how much cash it really generates, and how it stacks up against others in the market.

So, the “before” adjusts for the following items:

I is for INTEREST: Some startups raise equity investment. Others are financed by debt or a mix of the two. To compare the profits of an equity business to a debt-financed one, any interest charges appear after (or below) EBITDA.

T is for TAX: Startups can have a mix of accumulated tax losses, significant capital allowances, chunky R&D tax credits and other things affecting the tax charge and timing of taxes that appear in their P&L. So, to compare one business’s performance against another, taxes appear after EBITDA.

D is for DEPRECIATION: Depreciation is how tangible fixed assets (think of your computer equipment) get written off over their useful life. It’s old school accounting, and for most start-ups it's just some laptops, big screens and any office equipment of value. However, given that it is just writing off something already purchased, and is dependent on your accounting policy, to compare one business's profits to another, depreciation appears after EBITDA

A is for AMORTISATION: Not as frequently seen as depreciation, but other items capitalised (think of a capitalised website cost or development costs) or intangible assets purchased (think of goodwill or premium paid when buying another business). As these also need to get written off over their useful life, to compare a business with no capitalised spend with a business with significant capitalised costs, any amortisation appears after EBITDA.

Operating Performance - How well you run the core businessCash Generation - What they'll actually receive from operationsComparability - Easy to compare to other acquisition targetsFlexibility - They can overlay their own financing and tax structure

“Our business makes £400K profit after tax.”

To a buyer, that sounds fine, but it raises questions:

“Is that figure after a chunky loan repayment? Does it include R&D tax credits? Are there one-off costs baked in?”

What they’re really thinking:

"It sounds like a decent business, but without more context, it’s hard to benchmark. Based on a typical valuation multiple of 3–4x net profit, that means the business may be worth £1.2 – £1.6M, if those profits are consistent."

“Our business generates £650K EBITDA.”

Now you’re speaking their language. That number is easier to compare with other targets and gives them a clearer picture of cash generation.

What they’re really thinking:

"Strong underlying performance. With a higher-quality business like this, EBITDA multiples can be 3.5–5.0x. If this holds up, we’re looking at a valuation around £2.3 – 3.25M depending on growth, market, and other factors."

Net profit tells you how much money you made under your specific circumstances. Whereas EBITDA tells buyers how much money they could make if they owned your business. For valuation purposes, the second number is what determines your selling price.

If you enjoyed these insights, dive deeper by listening to full episodes of The New F*Word Podcast here.

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Keep that boat afloat!Colin 👋