November 21, 2024 by Altigo Partners

EBITDA Isn’t the Full Story: What Business Owners and Buyers Need to Know

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Profitability isn’t just a number on a balance sheet—it’s a story that spans operations, growth potential, and market dynamics." While EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is often the star of the show in business valuations, it’s only one chapter in the book of a company’s value. If you’re solely focused on EBITDA, you might miss the nuances that define a business’s true worth.

At Altigo Partners, we’ve seen how a fixation on EBITDA can sometimes obscure the bigger picture. Whether you’re buying, selling, or simply looking to grow your business, understanding the context behind EBITDA is critical to making informed decisions. Here’s why EBITDA, while useful, is far from the full story—and what you should consider instead.


The Allure of EBITDA

EBITDA is popular for a reason. By stripping out interest, taxes, depreciation, and amortization, it offers a clearer picture of a company’s operational performance. This metric is often seen as a neutralizer, leveling the playing field by removing the impact of capital structure, tax environments, and accounting decisions.

Private equity firms and M&A advisors frequently use EBITDA as a starting point for valuations, especially in industries where operational efficiency is a key driver of value. It’s also a handy metric for comparing businesses across sectors, as it highlights operational performance without the noise of financial and structural differences.

💡 Did you know? In 2021, EBITDA multiples ranged from 4x to 10x depending on the industry and market conditions, according to data from PitchBook.

Yet while EBITDA can simplify comparisons, it’s a snapshot—a single lens that doesn’t always capture the full complexity of a business.

The Blind Spots of EBITDA

Focusing solely on EBITDA can obscure crucial factors that significantly affect a company’s value and future performance. Here are some of the most common blind spots:

  1. Cash Flow Tells a Different Story While EBITDA highlights operating profitability, it doesn’t account for cash flow, which is the lifeblood of any business. Cash flow considers working capital changes, debt obligations, and capital expenditures—real-world factors that impact a company’s ability to sustain operations.

“Cash flow is reality. EBITDA is just a theory”, as Warren Buffet would put it.

For example, a company with high EBITDA but significant working capital needs may struggle to generate free cash flow. This can signal operational inefficiencies or an inability to fund growth, which should raise red flags for buyers and investors.

  1. Growth Potential Isn’t Captured EBITDA measures the present, but valuations should also account for the future. Is the company in a growing industry? Are there opportunities to expand market share or diversify revenue streams? Metrics like customer acquisition cost (CAC), customer lifetime value (CLV), and revenue growth rate can offer deeper insights into future potential.

Key Takeaway: Look beyond the numbers and assess qualitative factors like market trends, competitive positioning, and scalability.

At Altigo Partners, we prioritize businesses with high EBITDA margins but also consider their long-term growth opportunities and industry resilience. Explore our investment criteria here.

When Debt and Capital Come Into Play

Another common pitfall is ignoring the impact of debt. While EBITDA excludes interest payments, a business with high levels of debt might struggle to meet its financial obligations. Similarly, capital expenditures (CapEx) are excluded from EBITDA but are critical for understanding a company’s reinvestment needs.

For example, a manufacturing business with high EBITDA may require ongoing investment in expensive equipment, eroding its true profitability.

Questions to Ask:

  1. How much debt does the company carry, and what are its interest obligations?
  2. What are the CapEx requirements, and do they align with the company’s growth trajectory?

At Altigo Partners, we see beyond the EBITDA multiple and consider how financial structure and operational needs shape the company’s overall health.

Operational Context Matters

EBITDA doesn’t tell you how a company achieves its numbers. Two businesses with identical EBITDA figures could have vastly different operations, cultures, and risks.

Consider These Scenarios

  • High Customer Concentration: A business deriving 60% of revenue from one client is riskier than one with diversified income streams.
  • Dependence on Key Employees: If a business’s success hinges on one or two individuals, the departure of those employees could lead to significant losses.
  • Recurring vs. One-Time Revenue: A business with steady, recurring revenue is more stable than one reliant on one-time sales.

We look for businesses with a strong operational foundation, resilient customer relationships, and minimal dependency on single points of failure.

Beyond the Metrics: The Intangibles

Finally, there’s the human side of every business—its culture, leadership, and reputation. These intangibles don’t appear in EBITDA calculations but can have a profound impact on value.

A 2022 survey by Deloitte found that businesses with strong cultures and employee satisfaction consistently outperform their peers, leading to higher customer loyalty and long-term profitability.

How to Evaluate Intangibles:

  • Conduct employee and customer interviews during due diligence.
  • Review online reviews, industry reputation, and competitive positioning.
  • Assess the quality of leadership and their commitment to the business’s future.

The Altigo Approach: A Holistic View

At Altigo Partners, we believe in looking beyond EBITDA to uncover the full potential of a business. While EBITDA is a useful metric, it’s just one part of a larger equation. Our approach includes:

  1. In-Depth Operational Analysis: Understanding how a business achieves its results.
  2. Future-Proofing: Assessing growth potential, market trends, and scalability.
  3. Cultural Alignment: Ensuring the business aligns with our values and goals.

Our investment philosophy is built on the principle that businesses are more than numbers—they’re living, breathing entities with unique challenges and opportunities.

Closing Thoughts

EBITDA is a helpful starting point, but it’s not the full story. By digging deeper into cash flow, growth potential, operational context, and intangibles, buyers and sellers can make smarter, more informed decisions.

At Altigo Partners, we’re committed to supporting businesses at every stage of their journey, ensuring that value is defined not just by profitability but by sustainability and potential. If you’re ready to take the next step, get in touch with us today.

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