What Is EBITDA? Meaning, Formula and Why Buyers Care

Ask most agency founders what their business is worth and you'll hear a revenue number. Ask a buyer the same question and you'll hear a different word entirely: EBITDA.

It's an ugly acronym, and it gets thrown around in board meetings as if everyone knows exactly what it means. Plenty of people nod along without being sure. If you ever want to sell, raise money or see how healthy your agency is underneath the revenue, it's the number to get comfortable with.

What does EBITDA actually mean?

EBITDA means earnings before interest, tax, depreciation and amortisation. In other words, it's the profit your business makes from doing its job, before you account for how it's funded (interest), what goes to HMRC (tax) and the accounting charges for wearing out your equipment and software (depreciation and amortisation). Stripping those out makes it much easier to compare two businesses fairly, or to compare your own business this year with last year, without the picture being muddied by loans, tax timing or a big office fit-out.

How to calculate EBITDA

There are two ways to get there, and both land in the same place.

From operating profit (the easier route):

EBITDA = operating profit + depreciation + amortisation

From the bottom line:

EBITDA = net profit + interest + tax + depreciation + amortisation

Start with operating profit if you can. It's usually right there in your management accounts, and there's less to add back.

A quick worked example

Take an illustrative 15-person creative agency:

That gives EBITDA of £230,000 and an EBITDA margin of roughly 12.8% (£230,000 divided by £1,800,000). These numbers are made up to show the maths, so please don't treat them as a benchmark.

What EBITDA leaves out, and why

Each of the four letters strips out something that tells you more about how a business is set up than how well it trades.

• Interest is the cost of your loans or overdraft. Two identical agencies can have very different interest bills simply because one borrowed and one didn't.
• Tax depends on reliefs, timing and the Corporation Tax rules in force, so it's taken out to compare like with like.
• Depreciation spreads the cost of physical things, like computers, furniture or a studio fit-out, over their useful life. HMRC actually ignores depreciation altogether and gives capital allowances instead, which is one reason your EBITDA and your tax bill rarely line up.
• Amortisation does the same job for intangible assets such as software licences or a capitalised website build.

For most agencies, depreciation and amortisation are small. The big exception is the year after you move into a new office, when the fit-out can add a noticeable depreciation charge for several years.

What does a good EBITDA margin look like?

EBITDA margin is EBITDA as a percentage of revenue, and it sits alongside gross, operating and net margin as one of the four margins worth tracking:

EBITDA margin = EBITDA ÷ revenue × 100

You won't find one magic number, because for agencies it depends heavily on one thing: what you count as revenue.

Gross billings vs the fees you keep

If your revenue includes money that passes straight through to someone else, such as media spend, production costs or talent fees, your margin will look much thinner than an agency that only reports the fees it keeps. Two agencies with identical profits can show wildly different margins for that reason alone.

So before you compare yourself with anyone else, check you're both measuring the same thing.

Watch the trend, not just the number

Within your own business, the direction matters more than the headline figure. If revenue is growing but your margin is quietly shrinking, that's usually the first sign that pricing, utilisation or overheads have drifted. It's one of the first patterns worth looking for in your own numbers.

Adjusted EBITDA: the number buyers really negotiate

When it comes to selling, you'll quickly hear about adjusted EBITDA. It starts with your EBITDA and strips out anything unusual, or anything that wouldn't carry on under a new owner. Typical adjustments in an owner-managed agency include:

• One-off costs, such as legal fees from a dispute, a restructure or a rebrand
• Founder pay, adjusted to what it would cost to hire someone to do the job at market rate
• Personal or non-business costs that have been running through the company

Every one of those adjustments needs evidence behind it, and a buyer's advisers will test each one. The founders who get the best outcome are usually the ones who kept clean records long before a sale was on the table.

Why buyers care so much about EBITDA

When a private business is sold, buyers commonly value it as a multiple of EBITDA. The multiple is how much they're prepared to pay for each pound of sustainable profit, and it moves with things like size, growth, how predictable your income is and how much the business depends on a handful of clients or on you.

Why a small improvement can be worth a lot

This is the part founders tend to sit up for. Because value is a multiple of EBITDA, adding £50,000 to your annual EBITDA can add several times that to the value of the business. Raising prices, lifting utilisation and cutting costs that don't earn their keep all feed straight into that number, and setting day rates and retainers that cover your true costs is usually the biggest of the three.

How much of the sale price you actually keep also depends on tax reliefs such as Business Asset Disposal Relief, so it's worth taking advice well before any deal.

The multiple is partly in your hands, too

Recurring retainers, a healthy spread of clients and a team that can run things without you all tend to push the multiple up at the same level of EBITDA. If a sale is anywhere on your horizon, getting your leadership, operations and finances aligned is usually where that work starts.

Why EBITDA isn't the same as cash

This catches out a lot of growing agencies. EBITDA measures profit, not money in the bank, so it ignores:

• Money tied up in unpaid client invoices
• Spending on equipment or a new office
• Loan repayments and tax bills
• Dividends paid to shareholders

That's how an agency can report rising EBITDA while its bank balance falls month after month. EBITDA tells you whether the business model works. Cash tells you whether you can keep running it. You need both, and a rolling 13-week cash flow forecast alongside your EBITDA is what joins them up.

How to improve your EBITDA

In a service business, most of the gains come from a short list of levers:

1. Price. A price rise with no extra hours worked goes almost straight to EBITDA. A pricing strategy review is often your quickest win.
2. Utilisation, the share of your team's time that's actually billable. A few percentage points make a big difference.
3. Client and project margins: knowing which work makes money and which just keeps everyone busy.
4. Overheads, meaning software, space and roles that no longer fit the size of the business.

The hardest part is usually the first step: seeing your numbers clearly enough, and often enough, to know which lever to pull. That's the gap a fractional CFO is there to fill.

FAQs

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