Where EBITDA Works and Where It Gets Complicated

One page, eight deal types, color-coded by how far the number can drift

EBITDA gets used like it means the same thing in every deal. It doesn't. A CPA firm and a trucking company can post identical EBITDA and have completely different real earnings once you account for what each one has to reinvest to keep running.

This is the read I keep handy when sizing up a target. Use it as a first-glance filter on how much work the number will need.

Green. EBITDA is a clean proxy. Asset-light, low capex.
Amber. Works after adjustment. Normalize comp, watch working capital.
Orange. Gets complicated. Capex is real, or rent has to come back in.
Red. EBITDA alone is inadequate. Free cash flow is the real metric.

Infographic titled Where EBITDA Works and Where It Gets Complicated. Eight lower middle market business types color-coded green to red by how reliably EBITDA reflects true earnings, from asset-light professional services and SaaS through manufacturing and trucking to capital-intensive businesses where free cash flow is the real metric.

Questions on a specific deal?

Send a note and I'll get back to you. If you're sizing up a target and want a second set of eyes on the numbers, tell me a little about it.