What Is EBITDA and Why It Matters for Home Service Businesses

I think I've asked most PE representatives on this show, but let's just make sure everyone knows what it is. Can you define EBITDA for me?

So it's an acronym for earnings before interest, tax, depreciation and amortization and it became more common back in the 80s so it's been around now for 40 plus years and it's really a proxy for cash flow. So if you think about it, depreciation and amortization, those are accounting metrics. They aren't actual cash flow deductions from the business. Now in businesses that have a lot of capital expenditure requirements, they have to take their earnings and go buy new machines to keep growing. But trades businesses don't necessarily have to do that. If you're leasing your vehicles, leasing your equipment, your capital requirements can be quite low. So EBITDA is really a great proxy for the true earnings power of the company. That is the single metric that people use to hinge their valuation off of.