EBITDA =*Earnings (Net Income)*Before*Interest (I) +*Taxes (T) +*Depreciation (D) +*Amortization (A)

EBITDA measures the profitability from the core operations of the business before the impact of*debt*(Interest),*taxes*and*non-cash expenses*(Depreciation & Amortization). It eliminates the impact of*financing*(Interest) and*accounting decisions*(Depreciation & Amortization), which can vary.

Here is a description of each component of EBITDA:

(E) Earnings:*This is the net income of the business after all operating expenses (e.g., insurance, rent, payroll, etc.).

(B) Before:*Referring to “Earnings Before”…

(I) Interest:*This includes interest from all debt financing, such as loans provided by banks. Different companies have different capital structures (i.e., varying levels of debt), resulting in different interest payments, which therefore results in varying net incomes. EBITDA allows you to easily compare two businesses while ignoring the capital structure of each business, which changes post-acquisition anyway. In other words, EBITDA includes interest payments because interest payments discontinue post-acquisition in most cases (there are rare exceptions).

(T) Taxes:*This includes city, county, state, and federal income taxes. Income taxes vary based on a number of factors and are likely to change post-acquisition. As a result, EBITDA includes taxes in its calculation. Note: Only income taxes are added back; do not add back sales or excise tax.

(D) Depreciation:*Depreciation is a non-cash expense. Methods of depreciation vary by company based on the method of depreciation used. Actual cash flow is based on real capital expenditures, not depreciation; therefore depreciation is added back.

(A) Amortization:*Amortization is a non-cash expense and is the “depreciation” (technically “write-down”) of intangible assets, such as patents or trademarks.

Example EBITDA Formula & Calculation

Net Income*(Earnings, or “E”) = $700,000

EBITDA*= Net income (Earnings), plus:

Plus*Interest*(I): $400,000
Plus*Taxes*(T): $300,000
Plus*Depreciation*(D): $200,000
Plus*Amortization*(A): $100,000

EBITDA*= $1,700,000($700,000 (E) + $400,000 (I) + $300,000 (T) + $200,000 (D) + $100,000 (A))

So how can you use this for pre-qualifing*for a SBA loan?

Just look at the tax return.* If it shows negative net income, you can add the above to show positive and show that in your submission.

Net income is negative.............EBIDTA*is positive.......................

When you look at salaries on a tax return, MAKE SURE OFFICER'S SALARIES ARE AVAILABLE SEPARATELY....EITHER ON THE TAX RETURN OR ON THE P & L.

You can also take out* officer's salaries from a negative income and add it as income.* Along with depreciation. Etc.