Spend any time around business sales and you will hear one word more than any other. EBITDA. Buyers quote it, advisers price off it, and owners come to see it as the measure of their success. It is a useful number, but it carries a quiet danger. Many owners treat EBITDA as the cash the business generates, and it is not. Understanding the gap between the two changes how you think about your value.
What EBITDA actually measures
EBITDA stands for earnings before interest, tax, depreciation, and amortisation. In plain terms, it strips out financing costs, tax, and non cash accounting charges to show the underlying operating profit of the business. The reason buyers like it is that it lets them compare businesses on a like for like basis, before the effects of how each one is financed or taxed.
So far so useful. The problem begins when an owner sees an EBITDA of, say, R60 million and assumes the business throws off R60 million in cash they could spend. It does not, and the difference is where a lot of misunderstanding lives.
What EBITDA leaves out
Three big things sit between EBITDA and the cash you actually keep. The first is capital expenditure. If your business needs to buy or replace equipment, vehicles, or premises to keep running, that spending is real cash leaving the business, even though it barely touches EBITDA. A business that must reinvest heavily generates far less free cash than its EBITDA suggests.
The second is working capital. Growth ties up cash in stock and unpaid invoices, and a fast growing business can be highly profitable on paper while its bank balance goes backwards. The third is tax and interest, which EBITDA deliberately ignores but which you very much have to pay. Add these together and the cash a business genuinely produces can be well below its headline EBITDA.
Why this matters when you sell
Buyers know all of this, which is why they do not stop at EBITDA. A sophisticated acquirer will look hard at how much cash your business actually converts from its profit, how much reinvestment it needs to stand still, and how much of the profit is real and recurring. A business with high EBITDA but heavy capital needs will attract a lower multiple than one with the same EBITDA that converts cleanly into cash.
This is why two businesses with identical EBITDA can sell for very different prices. The one that turns profit into cash with little reinvestment is simply worth more, because the buyer keeps more of what they buy.
What to take from this
None of this means EBITDA is wrong or useless. It remains the common language of business valuation, and you should understand yours well. But do not fall into the trap of treating it as spendable cash, and do not be surprised when a buyer digs beneath it to find the real cash generation underneath.
The practical lesson is to understand your own cash conversion before a buyer does. Know how much your business really produces after reinvestment, working capital, tax, and interest. That number, not EBITDA alone, is closer to what a buyer is truly paying for, and understanding it puts you on equal footing at the table.