Goodwill: what it means for business borrowing
Goodwill is the part of a business's value that is not in its physical or separately identifiable assets: its reputation,…
Acquisition finance
EBITDA: what it means for business borrowing
EBITDA meaning: earnings before interest, tax, depreciation and amortisation. A UK worked example, EBITDA multiples and how lenders size business loans on it.
In this guide
EBITDA means earnings before interest, tax, depreciation and amortisation: operating profit with the non-cash charges for depreciation and amortisation added back. It is widely used as a proxy for the cash a business generates from trading, before it pays lenders and HMRC.
How to calculate EBITDA
EBITDA = operating profit + depreciation + amortisation. Starting from net profit, you add back tax and interest as well.
| Illustration: a UK engineering company | £ |
|---|---|
| Operating profit | 420,000 |
| Add depreciation on machinery and vans | 95,000 |
| Add amortisation of goodwill | 25,000 |
| EBITDA | 540,000 |
Lenders then make adjustments to reach an "adjusted" or "normalised" EBITDA: for example adding back a one-off legal bill, or deducting a fair salary where an owner has paid themselves very little. EBITDA is not a measure defined by UK accounting standards, so check how each lender defines it in its offer and covenants.
EBITDA multiples
When a business is bought, the price is often expressed as a multiple of EBITDA: a £2.7 million price for the company above would be five times EBITDA. Lenders also express debt as a multiple of EBITDA (leverage). Both multiples vary by sector, size and the quality of earnings, so treat any published "typical multiple" with care.
How EBITDA affects borrowing
- Acquisition finance is usually sized on the target's EBITDA, with the lender checking that debt is a comfortable multiple of it.
- Covenants in larger facilities often test leverage (debt ÷ EBITDA) and interest cover every quarter.
- Cash flow lenders lend against earnings rather than assets, so a steady, well-evidenced EBITDA can support borrowing beyond the value of the business's assets.
If you are buying a business or refinancing on the strength of earnings, see acquisition finance and direct lending. We search the market and present your earnings the way lenders assess them. Any broker fee depends on the lender, with nothing to pay upfront.
£137,500A transaction we arranged£137.5K to fund an accountancy practice acquisition.An established firm had an acquisition agreed. We structured the funding around the transaction and got it completed.Related terms
Sources
This guide is general information, not financial advice. Lenders set their own criteria, rates and terms, and all finance is subject to status.
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FAQs
Common questions
Is EBITDA the same as profit?
No. EBITDA is profit before interest, tax, depreciation and amortisation, so it is higher than net profit for most businesses. It ignores the cost of replacing equipment and of servicing debt, which is why lenders look at cash flow and debt service cover as well.
How much can I borrow against EBITDA?
Lenders size cash flow and acquisition loans as a multiple of EBITDA and test that repayments are covered with room to spare. The multiple depends on the lender, sector, track record and security, so there is no fixed figure. Our acquisition finance page explains how lenders size a purchase.
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