Guide · 8 min read
What EBITDA means, how to calculate it from a UK profit and loss account, adjusted EBITDA and add-backs, its weaknesses, and why every acquisition lender and buyer prices a business off it.
Written by Matt Lenzie · Published 3 September 2026
Advice from Matt Lenzie · 25-year career banker (Bank of Scotland, Lloyds Banking Group). £400m+ raised for clients.
Founder profile →EBITDA is a company's earnings before interest, tax, depreciation and amortisation. It is the closest single figure to the cash the trading operation produces before the effects of how the business is financed, where it pays tax and how it writes down its assets, and it is the number every UK acquisition lender and buyer works from.
That matters practically rather than academically. Businesses are bought at multiples of EBITDA and loans are sized at multiples of EBITDA, so a £100,000 movement in the figure moves a price by several hundred thousand pounds and a loan by a similar amount. This guide sets out what each element means, calculates EBITDA from a UK profit and loss account, works through the adjustments that survive diligence and the ones that do not, and explains where the measure is genuinely misleading.
Read the acronym as an instruction: start with earnings, then remove four things.
The logic of removing depreciation and amortisation is that both are accounting allocations of money spent in the past, not cash leaving the business this year. The weakness of removing them, which we return to below, is that the underlying assets do eventually need replacing.
Two routes, same answer. Working down from operating profit is quicker; working up from profit after tax is a useful check. Here is an illustrative UK trading company, presented the way a set of FRS 102 accounts would show it.
| Profit and loss line | Amount | Note |
|---|---|---|
| Turnover | £12,400,000 | Revenue for the year |
| Cost of sales | (£7,750,000) | Gross margin of 37.5% |
| Gross profit | £4,650,000 | |
| Administrative expenses | (£3,180,000) | Includes depreciation and amortisation |
| Operating profit | £1,470,000 | The starting point for EBITDA |
| Add back depreciation | £310,000 | Disclosed in the tangible fixed assets note |
| Add back amortisation | £95,000 | Goodwill from an earlier acquisition |
| EBITDA | £1,875,000 | 15.1% of turnover |
| Interest payable | (£180,000) | Existing bank and asset finance |
| Profit before tax | £1,290,000 | Operating profit less interest |
| Corporation tax at 25% | (£322,500) | Main rate as at September 2026 |
| Profit after tax | £967,500 | Roughly half of EBITDA |
The illustration makes the central point on its own. EBITDA of £1.875 million and net profit of £967,500 describe the same year in the same company. A buyer paying five times EBITDA is offering £9.375 million for a business that reports under a million pounds of retained profit, which is not a contradiction: the debt, the tax position and the depreciation policy all change on completion.
Adjusted EBITDA restates the figure for items a new owner would not inherit, or would inherit on different terms. It is the number a price and a loan are actually based on, and it is the most argued-over line in any transaction. Continuing the illustration above:
| Adjustment | Amount | Does it usually survive due diligence? |
|---|---|---|
| Reported EBITDA | £1,875,000 | |
| Owner remuneration normalised to a market salary for the role | +£120,000 | Yes, where the replacement cost is evidenced by a job specification and market data |
| One-off legal costs of a settled dispute | +£65,000 | Yes, if genuinely non-recurring and supported by invoices |
| Non-recurring relocation costs | +£40,000 | Usually, where the move is complete and will not repeat |
| One-off grant income received in the year | (£30,000) | Yes, and buyers should propose it before the vendor is asked |
| Rent restated to market on a property owned by the vendor | (£55,000) | Yes, and it frequently reduces EBITDA rather than increasing it |
| Adjusted EBITDA | £2,015,000 | The figure a price and a loan are sized on |
Add-backs that rarely survive are worth knowing in advance: recurring costs relabelled as exceptional, forecast synergies presented as though already achieved, "one-off" items that appear in three consecutive years, and cost savings the buyer intends to make after completion. A credit committee will strip all four out, so a case built on them fails late and expensively.
Three measures, three questions.
EBIT is earnings before interest and tax, so it keeps depreciation and amortisation as costs. It is the more honest measure for a capital intensive business, because a haulage operator or a manufacturer genuinely does have to replace its assets, and depreciation is a reasonable long-run proxy for that cost. Analysts favour EBIT where the asset base is heavy and EBITDA where it is light.
Operating cash flow starts from EBITDA and then charges the three things EBITDA ignores: the movement in working capital, tax actually paid, and capital expenditure. This is where reported earnings meet reality. A business growing at 25% a year can show rising EBITDA and falling cash, because debtors and stock absorb the profit before it arrives.
Our illustrative company shows the gap clearly. Adjusted EBITDA of £2.015 million, less corporation tax of about £370,000, less maintenance capital expenditure of £280,000, less working capital absorption of £150,000, leaves roughly £1.2 million of cash available to service debt. That £1.2 million, not the £2 million, is what a lender divides by debt service to reach a cover ratio, as our guide to leverage ratios and debt to EBITDA sets out.
Because it is the only widely understood figure that is neutral about the two things a transaction changes: the capital structure and the tax position. When a bank lends £6 million to fund a buyout, the target's historic interest charge becomes irrelevant, its tax position changes, and the depreciation policy may be restated. EBITDA is the layer of the profit and loss account that survives all of that intact.
It is also the common currency of the market. Vendors, corporate finance advisers, private equity houses and credit committees all talk in multiples of EBITDA, so a business described as changing hands at six times earnings is immediately comparable with another at four. Indicative UK acquisition leverage as at September 2026 runs at senior debt of 2.5x to 3.5x EBITDA and total debt of 3.5x to 5.0x where unitranche or mezzanine layers are used, with equity of 30% to 50% of enterprise value. Every one of those numbers is an EBITDA multiple, which is why the figure has to be right before anything else can be.
Real ones, and any lender who has been through a cycle will list them without prompting.
Adding back depreciation treats asset replacement as though it never happens. For a software business that is broadly fair. For a haulage company replacing tractor units every five years it is a fiction, and it is why capital intensive businesses trade on lower EBITDA multiples and borrow at lower leverage than asset-light ones.
A business can be EBITDA positive and cash negative for years. Growth, extended debtor days, stock building and a large tax charge all consume cash that EBITDA does not see.
FRS 102 does not define EBITDA, so there is no authoritative version. That is why every facility agreement writes its own definition, why the vendor's information memorandum and the buyer's financial due diligence report often disagree by a material margin, and why the definition clause deserves as much attention as the covenant level.
The market has seen enough aggressively adjusted EBITDA to be sceptical of it. Where a schedule of adjustments runs to fifteen lines and increases the figure by 40%, an experienced credit officer stops looking at the total and starts looking at the cash in the bank.
Two multiples, applied to the same number. The valuation multiple sets the price: UK lower mid-market trading companies commonly change hands somewhere in the range of four to eight times adjusted EBITDA depending on sector, growth, customer concentration and management depth, with software and healthcare at the top of that range and contracting and hospitality at the bottom. The leverage multiple sets the debt, at the indicative bands above.
The relationship between them is the whole deal. A business bought at five times EBITDA with senior debt at three times is 60% debt funded and 40% equity funded. The same business bought at seven times with the same three times of debt needs materially more equity, which is why price discipline and funding capacity are the same conversation rather than two separate ones. Run the arithmetic yourself in our LBO calculator, or read how the layers stack in leveraged buyout structure.
We construct it the way a credit committee will, not the way a vendor would prefer. That means starting from filed accounts rather than a spreadsheet, tying the adjustments to evidence, proposing the downward adjustments as well as the upward ones, and testing the result against bank statements and cash conversion. A number built that way survives financial due diligence, and a number built the other way collapses in week six of a transaction.
From there the work is structural: sizing senior debt against free cash flow, seeing what cash flow lending or asset based lending can add, and taking the case to our panel of 40+ banks, debt funds and asset based lenders. We bring 25 years in banking with significant transactional experience including leveraged buyouts and acquisitions, and £400m+ raised, to that assessment. Read on in how to finance a business acquisition and how to get a loan to buy a business, or speak to us about your target. Management teams buying their own employer will also find our sister site MBOFinance.co.uk relevant.
It tells you roughly how much cash the trading operation generates before the effects of how the business is financed, where it is taxed and how it accounts for the cost of its long-term assets. Strip out interest and you can compare a debt-free company with a leveraged one. Strip out tax and you can compare across jurisdictions and loss histories. Strip out depreciation and amortisation and you remove non-cash accounting charges that depend on when assets were bought and how they are written down. What is left is a proxy for operating cash generation, which is exactly what a lender needs, and it is a proxy rather than a measurement.
No, and the difference is usually large. Net profit is what remains after interest, tax, depreciation and amortisation have all been charged, so it is the shareholders' number. EBITDA sits several lines higher up the profit and loss account. A company with £1.87 million of EBITDA, £310,000 of depreciation, £95,000 of amortisation, £180,000 of interest and corporation tax at the 25% main rate reports net profit of under £1 million. Both figures are correct and they answer different questions: net profit asks what the owners earned, EBITDA asks what the trade produced.
Take operating profit from the profit and loss account and add back the depreciation charge and any amortisation charge, both of which are usually disclosed in the notes to the accounts under FRS 102. The alternative route starts at profit after tax and adds back tax, interest, depreciation and amortisation in turn, which gives the same answer and is a useful cross-check. Neither route requires judgement. The judgement comes afterwards, when you adjust the result for owner remuneration, non-recurring costs and connected party transactions to arrive at adjusted EBITDA.
The absolute figure means little without context; the margin and the cash conversion mean a great deal. As a rough guide, an EBITDA margin above 20% of turnover is strong in most UK sectors, 10% to 20% is normal for manufacturing, distribution and business services, and under 10% is thin and typical of contracting, food retail and haulage. What lenders care about at least as much is cash conversion: operating cash flow of 80% or more of EBITDA suggests the earnings are real, while conversion of 50% signals that working capital or capital expenditure is consuming the profit.
Adjusted EBITDA is reported EBITDA restated for items a buyer would not inherit or would inherit differently: an owner paying themselves above or below a market salary, genuinely one-off legal or restructuring costs, rent charged by a connected landlord at other than a market rate, and non-recurring income that should be stripped out. It matters because acquisition prices and loan quantums are multiples of it, so a £150,000 adjustment at a five times multiple moves the price by £750,000. It is also the most contested number in any transaction, which is why financial due diligence exists.
EBITDA ignores three cash items that operating cash flow captures: the movement in working capital, tax actually paid, and capital expenditure. A business growing quickly can report rising EBITDA while consuming cash, because debtors and stock absorb it faster than profit replaces it. That gap is why a lender calculates debt service cover on cash flow after tax and maintenance capital expenditure rather than on EBITDA, and why cash conversion is monitored throughout the life of a facility.
Not as a required line. FRS 102, the UK GAAP framework most private companies report under, does not define EBITDA, so you will not find it in the primary statements. You construct it from operating profit plus the depreciation and amortisation charges disclosed in the notes. Because it is not a defined measure, two advisers can present different EBITDA figures from identical accounts without either being wrong, which is exactly why every facility agreement contains its own definition and every covenant is tested against that definition rather than a standard one.
This guide is general information about unregulated business lending, not tax, legal or accounting advice, and the figures used are illustrative. Pricing and leverage bands are indicative as at September 2026. Lenzie Consulting Ltd is not authorised or regulated by the FCA; we arrange unregulated business finance for limited companies and LLPs only.
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