EBITDA comes up constantly in investor conversations, valuation discussions and exit negotiations – but it’s one of those terms founders often nod along to without being entirely sure how it works or when it actually matters for their business.
This article breaks down what EBITDA is, why investors use it, how to calculate it and – just as importantly – when it isn’t the right metric to be leading with.
If you’d like help understanding how your current financials stack up against investor benchmarks, book a free call with Standard Ledger.
What Is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. It measures your company’s profitability from core operations by stripping out the costs that relate to how you’ve financed the business, your tax position and non-cash accounting items.
The formula is straightforward:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortisation
Or if your P&L shows operating profit directly:
EBITDA = Operating Profit + Depreciation + Amortisation
A worked example
Say your startup’s financials for the year look like this:
- Net income: £100,000
- Interest expenses: £20,000
- Taxes: £10,000
- Depreciation: £15,000
- Amortisation: £5,000
EBITDA = £100,000 + £20,000 + £10,000 + £15,000 + £5,000 = £150,000
That £150,000 figure gives investors a view of how the business performs operationally, separate from your financing structure or tax strategy.
Why Investors Use EBITDA
The reason investors gravitate toward EBITDA is standardisation. Because it strips out financing costs and tax treatment – both of which vary between businesses and markets – it creates a more like-for-like basis for comparison.
For UK acquirers and growth-stage investors, EBITDA is the basis for EV/EBITDA – the enterprise value to EBITDA multiple. This multiple is one of the most common valuation benchmarks used in trade sales and growth-stage deals, and knowing where your business sits relative to sector comparables matters when you’re preparing for an exit or a late-stage raise.
A strong, improving EBITDA trajectory signals operational efficiency and a business that’s getting more profitable as it scales – exactly what investors want to see before writing a larger cheque.
When EBITDA Matters – and When It Doesn’t
Here’s the nuance that often gets missed: EBITDA is most useful for businesses that are profitable or close to it. For early-stage, pre-revenue or high-growth SaaS startups, it’s rarely the primary metric investors are focused on.
At the seed stage and Series A in the UK, most investors are looking at ARR growth rate, burn multiple, CAC payback period and net revenue retention – not EBITDA. A startup burning through cash to acquire customers and build product won’t have a meaningful EBITDA figure, and that’s expected. Investors at that stage understand the model.
EBITDA becomes the relevant conversation when you’re approaching profitability, preparing for a trade sale, or working with private equity investors who use it as the foundation of their valuation methodology. If you’re at Series B or beyond, or if you’re beginning to think seriously about exit, it’s the metric you need to have a clear handle on.
The Limitations of EBITDA
EBITDA has a well-known set of criticisms that are worth understanding before you lean on it too heavily.
It doesn’t reflect cash flow. Because it adds back non-cash charges like depreciation and amortisation but ignores capital expenditure and debt repayments, EBITDA can make a business look healthier from a cash perspective than it actually is. A manufacturer or a business with significant fixed assets and capital spending needs may have a strong EBITDA but genuinely constrained liquidity.
It also ignores working capital. A business growing rapidly may show strong EBITDA while simultaneously burning cash because of the working capital tied up in that growth – inventory, longer debtor days, upfront costs ahead of revenue. That doesn’t show up in EBITDA at all.
For these reasons, sophisticated investors and acquirers will always want to see EBITDA alongside free cash flow, net income and your cash runway, not as a replacement for them.
How to Improve Your EBITDA
If EBITDA is the right metric to be optimising for at your current stage, there are three levers worth focusing on.
The first is revenue growth without proportional cost growth. As your revenue base increases, if you can keep your operating cost base relatively flat – through automation, better tooling or operational efficiency – EBITDA improves significantly. Upselling and expansion revenue within your existing customer base is often the most capital-efficient way to drive this.
The second is gross margin improvement. EBITDA is directly downstream of gross margin. If you’re delivering services at low margin, subsidising contracts to land customers or underpricing relative to your true cost to serve, your EBITDA ceiling is low regardless of how much revenue you generate. Reviewing pricing and the cost of delivery together tends to have the most direct impact.
The third is operating cost discipline. Not across-the-board cuts, but a clear view of which costs are driving growth and which aren’t. Regular review of supplier contracts, headcount allocation and any costs that have grown with the business without being tied to a clear output are worth scrutinising.
Getting the Numbers Right
Understanding EBITDA is one thing – having a financial model that gives you a clear, real-time view of where your business sits against it is another.
At Standard Ledger, we work with UK founders at growth stage and beyond to build the financial foundations that make investor conversations straightforward. If you’d like a review of your financial model or a clearer picture of how your metrics compare to investor benchmarks, get in touch for a free consultation.
