What is EBITDA and Why is it Used in M&A Valuation?

It the most prominent valuation methodology is the multiple of earnings method, where earnings is defined as EBITDA.  

So what is EBITDA?  Earnings Before Interest, Taxes, Depreciation, and Amortization

Why use EBITDA instead of net income or operating income?  EBITDA focuses on the business’s earnings generated from core business operations without the influence of financing, accounting, or tax decisions.  

EBITDA is often considered a proxy for operating cash flow, just note that it’s an imperfect one, as it does not account for capital expenditures or working capital changes.

Overall, EBITDA allows M&A buyers to analyze to assess the company's operational efficiency and profitability and to have a consistent basis for comparison between companies within the same industry, regardless of their capital structure, tax jurisdictions, or depreciation policies.