Myths About EBITDA That Hurt Your Business Value

When business owners talk about valuation, one term tends to dominate the conversation: EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). It's a common performance metric used in both internal financial planning and external deal negotiations.

However, it is important to note that this topic is also among those that are frequently misunderstood. Understanding its complexities can be challenging, leading to various misconceptions and misinterpretations.

Let’s bust some of the most damaging EBITDA myths that can lead to valuation errors—and ultimately, lower your business’s perceived worth.

Myth #1: “My EBITDA is my business value.”

Why it’s wrong:

EBITDA is not your business’s value—it’s just a starting point. While it’s often used in valuation as a baseline metric, businesses are not valued based on EBITDA alone. Multiple factors come into play, such as:

• Industry risk

• Growth potential

• Customer concentration

• Operational dependencies

• Recurring vs. one-time revenue

  
  

What to understand instead:

The worth of your business is based on two main aspects: the amount of money your business generates and the reliability and transferability of those earnings to future buyers.

This means that simply having high earnings isn't enough; the consistency of those earnings and how easily they can be shared or passed on to someone else also play crucial roles. When valuing a business, professionals often apply multiples to EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. However, it's important to note that these multiples can differ significantly based on several factors, including the type of business, its size, and the overall risk associated with it. Understanding these elements can provide deeper insight into the assessment of business value.

Action Steps:

• Get a professional valuation that adjusts for risk and industry-specific factors

• Benchmark your business against peers in your industry, not just your EBITDA

  
  

Myth #2: “Add-backs make my EBITDA whatever I want it to be.”

Why it’s wrong:

Some owners try to “normalize” EBITDA by adding back personal expenses, one-time costs, or discretionary spending. While legitimate add-backs are part of the process, you can’t just inflate your numbers without scrutiny.

Buyers (and valuation professionals) will challenge your assumptions. Overstating add-backs damages credibility and may derail a sale or financing deal.

What to understand instead:

Only reasonable, clearly documented add-backs are accepted. Examples include:

• Owner’s salary above market rate

• One-time legal fees

• Non-operating expenses

But if you’re claiming add-backs every year for similar expenses, they’re likely part of normal operations.

It's important to be careful in this area. If a business keeps claiming the same add-backs every year, it could signal a problem. This pattern might mean that these expenses are regular business costs instead of unusual expenses. In simpler terms, if a business frequently claims these add-backs, they may be necessary for daily operations and should be included in the overall financial review.

Action Steps:

• Keep clear records for all add-backs, including invoices and explanations

• Have a valuation expert review your add-back assumptions before using them in negotiations

  
  

Myth #3: “Tax strategies don’t affect EBITDA, so I’m good.”

Why it’s wrong:

It’s true that EBITDA is calculated before taxes, but aggressive tax strategies can still hurt your valuation. For example, underreporting income or running excessive personal expenses through the business might reduce taxes—but it also lowers reported EBITDA, potentially hurting your valuation. Additionally, buyers or banks may view creative accounting as a red flag.

What to understand instead:

Maximizing tax savings should never come at the cost of transparency or credibility. A clean, accurate financial picture builds trust and earns higher multiples. EBITDA is a useful tool but can be misleading if not used properly, especially when comparing companies with different capital structures or tax strategies.

Action Steps:

• Work with your CPA to balance tax strategy with long-term value goals

• Consider getting a “clean set” of financials if preparing for a valuation or sale

  
  

Myth #4: “EBITDA is all that matters to buyers.”

Why it’s wrong:

Buyers look at much more than EBITDA. They consider your customer base, team, systems, growth trajectory, and risk exposure. A business with strong EBITDA but poor infrastructure, outdated systems, or key-person dependency may be worth less than a lower-EBITDA business that runs like a machine.

What to understand instead:

EBITDA may open the conversation—but quality, consistency, and scalability close the deal.

Action Steps:

• Build documented systems and reduce reliance on the owner

• Diversify your customer and revenue base

• Show year-over-year consistency or upward trends in performance

  
  

Final Thoughts: EBITDA ≠ Value

Using EBITDA alone to judge your business’s worth is like looking at a car’s top speed without checking the engine, tires, or reliability.

This is just one component or element of a much larger picture or scenario. It plays a role in a bigger context, and while it has its own importance, it should be viewed as part of a more extensive framework. Understanding this single piece can help clarify the overall situation, but it is essential to consider all elements together to gain a complete understanding.

If you’re planning to grow, sell, or refinance your business, take the time to understand how EBITDA myths lead to valuation errors—and how to avoid them.

Need Help Separating Fact from Fiction in Your Business’s Financials?

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