What is EBITDA?

If you’re a business owner, you should get familiar with the ins and outs of EBITDA. It stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Understanding how EBITDA affects your business’s value, including the selling price, will give you a leg up against the competition and help you prepare your business for a sale while showing potential buyers you are knowledgeable.

EBITDA entails many of your expenses and earnings but does not include the interest you pay on business taxes or loans. You can look at EBITDA as a financial measure of the stability of a company. It’s an economic calculation that potential buyers, financial analysts, and investors use when analyzing and valuing potential acquisitions. In addition, it’s a valuable measure of operating performance, allowing investors and businesses to evaluate efficiency, productivity, and return on investment without factoring in the impact of taxes, interest rates, asset bases, and other business costs.

The Importance of EBITDA

EBITDA minimizes the nonoperating effects specific to each HVAC company, meaning investors can look solely at the performance measure of operating profitability. Such an analysis is valuable when buyers compare companies across the entire HVAC industry. It gives potential buyers a nutshell analysis of an HVAC company’s cash flow and profitability. It also eliminates some expenses that can vary greatly, such as interest and taxes. Here’s what else to know about an HVAC business owner wanting to sell:

  • An HVAC company’s profit and loss statement shows the interest you’ve been paying on your business loans.
  • If an HVAC business has high interest rates, they’re paying substantial interest, which reduces its profitability on paper.
  • Investors will want to look at a company’s financials without this element because interest is constantly changing.
  • A business buyer can pay off loans or consolidate to a loan with a lower interest rate.
  • As a result, a buyer will want to see a company’s financials look without interest factored in.

Taxes can change, too. Investors are often strategic. They can reduce taxes by moving locations or embracing a different tax planning strategy. Since it may change, investors want to avoid seeing a company’s profit after paying their current tax bill.


As mentioned, investors often use EBITDA times an industry multiplier to estimate the value of an HVAC business. The EBITDA number helps compare companies within the HVAC industry.

You must multiply each EBITDA by the industry multiplier to compare the businesses in different industries.

Example: If a company’s EBITDA is $50,000 and your industry multiplier is 10, your business might be worth $500,000. EBITDA times the multiplier is not the final number, though. Remember that investors consider many factors when deciding an offer price for a business.

How to Improve Your EBITDA

A high EBITDA will help exponentially when trying to sell your business at top dollar, qualify for a loan, or attract investors. Fortunately, you can change this number. You can work to improve your EBITDA by:

  • Reducing Expenses: The lower your expenses are, the higher your EBITDA is.
  • Increasing Revenue: Find ways to ramp up your business and boost recurring revenue. Offer service plans and encourage your customers to sign up for them. Hold a special event or sale that will bring increased sales.
  • Improving Inventory Management: If you have equipment or other inventory that always sits long before being used, your expenses might be higher than necessary. Consider setting minimum stock levels, understanding your supply chain, moving out slow-moving or obsolete inventory, and minimizing shrinkage.
  • Talk with Your Financial Advisor: Your financial advisor or accountant can help you find additional ways to improve your EBITDA. You might have some work to do, but boosting your EBITDA number will be worth it.

EBITDA: Not the End-All-Be-All

As crucial as EBITDA is when selling your HVAC business, it’s not the only number potential buyers look at. It overlooks other vital factors that may affect your company’s value. It doesn’t take depreciation or amortization into account. Depreciation is gradually writing off the value of capital assets over time.

Investors will first want to see your EBITDA without these numbers, but they will also want to know the value of all your assets. For example, you purchased $1 million of capital assets in total cash. Another HVAC business bought the same holdings and took out loans. That business has the same EBITDA as you, but you have more equity in your assets by owning them outright. Since the other business owner has to make monthly payments, they lack asset equity and incur interest expenses. This makes your business have a higher value than theirs.

When selling a business, it’s essential to put yourself in a buyer’s shoes and anticipate everything they will consider when looking to buy your HVAC company. EBITDA is an important metric, but there are others you need to understand. Sometimes, working with an HVAC business broker makes all the difference in understanding what to do before, during, and after the sale of your business. Preparing your business for the sale is half the battle, and we can take you through the process step by step.