What does EBITDA/R mean, and how does it affect my business’s value?

Image: Towfiqu barbhuiya for Unsplash

Understanding financial jargon can sometimes feel like learning a new language. One term you’re likely to come across - especially if you’re considering selling your business or acquiring another - is EBITDA/R, which stands for: Earnings Before Interest, Taxes, Depreciation, Amortisation and Rent (the ‘R’ is only added when the seller owns the freehold and pays themselves an internal rent and the freehold is then being sold with the business).

WHAT IS EBITDA/R?

Put simply, it’s a measure of how much money a business makes from its day‑to‑day operations before including certain costs. It helps people understand a company’s financial earnings performance without being influenced by things like:

• How much debt it has (interest)
• The particular tax arrangements in place for the business (taxes)
• How old its equipment is (depreciation)
• The value of long‑term assets (amortisation)

By stripping these out, EBITDA offers a clearer picture of a company’s core trading performance and the true underlying profitability of a business.

HOW IS EBITDA/R CALCULATED?

The basic formulas are:

EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortisation

Or, if you already know operating profit (EBIT):

EBITDA = Operating Profit (EBIT) + Depreciation + Amortisation

To calculate EBITDA/R, review the profit and loss account in your year‑end accounts.

Your agent will then help adjust and normalise these figures to reflect the business’s true ongoing profitability.

HOW IS EBITDA/R USED TO VALUE A BUSINESS?

Businesses are commonly valued for secured lending, transactional and sale purposes using the profits method, expressed as a Years Purchase (YP) multiplier, alongside analysis of comparable sales.

This involves applying a YP multiple to the practice’s EBITDA.

The YP multiple is carefully selected by having regard to comparable sales evidence, which will consider a variety of factors, such as:

• Whether it’s a leasehold or freehold business
• Nature of the property, its location, size, operational capacity and occupancy
• Quality of provision – Including the physical property, regulatory and operational factors
• Local market conditions
• Sales evidence associated with recent sales of comparable businesses

Multiples differ for a variety of reasons, and so it is always best to speak with your business agent to get an understanding of those applicable to your specific business.

EBITDA/R is a helpful way to understand how well a business performs before accounting for costs like debt, taxes, or depreciation. It enables comparisons between businesses, gives insight into operational strength, and underpins how businesses are appraised when they are being sold, acquired, or formally valued.

If you'd like help calculating your EBITDA/R or understanding what your business may be worth, get in touch via enquiries@christie.com