EBITDA is a business’s earnings before interest, tax, depreciation and amortization are subtracted back out — a proxy for the cash the operating business throws off before its financing structure and non-cash accounting choices are layered on top.
EBITDA does not appear anywhere in the Income Tax Act or the CBCA — it is a lending and deal-pricing convention Canadian dealmakers lay on top of a target’s financial statements, not a defined legal or tax term. Deavo.ai’s comparison of the two most common earnings bases in Canadian small and mid-market deals puts the distinction plainly: EBITDA “does not add back owner compensation in the same way, on the assumption that the business already pays, or would need to pay, a market wage to whoever runs it” — the opposite assumption from seller’s discretionary earnings, which assumes a single owner-operator.
For a sponsor, EBITDA is what the debt and pricing conventions actually key off once a deal has a management team in place. Deavo’s capital-stack data puts EBITDA-based debt sizing at a minimum debt-service coverage of “≥ 1.30× on EBITDA” for the $1M–$5M band, rising to a senior tranche of roughly “3.0× EBITDA” plus mezzanine debt in the $5M–$30M mid-market band, and prices enterprise value at “typically ~6–8× EBITDA” once a deal is large enough to be discussed in EBITDA terms at all.
A fund underwriting a bolt-on to an existing platform recasts the target’s income statement: net income $1.6M, plus interest $0.4M, tax $0.5M and depreciation & amortization $0.7M, gives EBITDA of $3.2M. At deavo’s sourced mid-market convention of roughly 6–8× EBITDA, that brackets an enterprise value of $19.2M to $25.6M before the fund’s own diligence adjustments — the range the investment committee memo starts from, not the number it ends on.
See also: Enterprise value · Multiple of earnings · Quality of earnings report.
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