The profit number a buyer cares about more than your net income
Two bakeries each post $80,000 in net income. The first owns its building outright and bought its ovens years ago. The second carries a big loan on a recently financed buildout and is writing off new equipment. On the bottom line they look identical. But strip out the financing and accounting noise, and the second bakery is generating far more operating cash — its net income is dragged down by interest and depreciation that have nothing to do with how well it actually bakes and sells. EBITDA is the number that reveals that gap.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. You start with net income and add those four items back. The logic: interest depends on how you financed the business, taxes depend on your jurisdiction and structure, and depreciation and amortization are non-cash accounting entries spreading old purchases across years. Remove all four, and what's left is a cleaner read on the profit the core operations throw off — before financing and accounting choices muddy the picture.
Here's why buyers, lenders, and investors reach for it first. If a company earns $500,000 in EBITDA on $2.5 million in revenue, its EBITDA margin is 20% — twenty cents of operating profit per dollar of sales. That margin lets you compare your business against a competitor with completely different debt loads, tax situations, and equipment ages. It's the closest thing to an apples-to-apples profitability number across companies that are financed and structured differently. It's also why most small-business sale prices are quoted as a multiple of EBITDA, not net income.
This calculator also breaks out EBIT (operating income — earnings before just interest and taxes, with depreciation and amortization left in) and your operating income, so you can see profitability at each layer. The difference between EBIT and EBITDA tells you how capital-intensive your business is: a wide gap means heavy depreciation, which means lots of equipment.
Run it before you approach a lender, before you entertain an offer to buy, or simply to track whether your core operations are getting more or less profitable over time — without the distortion of how you happen to be financed this year.