EBITDA for a small business: how to calculate it, the add-backs, and what buyers pay for it

EBITDA is net income with interest, taxes, depreciation and amortization added back. Knowing how to calculate EBITDA for a small business takes four lines of a QuickBooks P&L and a calculator. Buyers of businesses under about $1.5 million in earnings usually value on seller's discretionary earnings instead, which also adds back one owner's pay, and they apply a multiple: the median small business sold through BizBuySell in the first quarter of 2026 went for 2.7 times cash flow. The number that moves the price is rarely EBITDA itself. It is the add-backs you can prove, and the ones you claim that a buyer's accountant strikes out.

How to calculate EBITDA for a small business from a QuickBooks P&L

EBITDA is earnings before interest, taxes, depreciation and amortization. Run a twelve-month P&L in QuickBooks Online, find net income at the bottom, and add back four accounts: interest expense, income tax expense, depreciation expense and amortization expense. If the company is an S corporation or a partnership, income tax is paid on your personal return, so that add-back is zero.

The trap is depreciation. If your bookkeeper posts book depreciation month by month and your CPA takes Section 179 on the tax return, the $58,000 truck write-off is on the return and not on the P&L, and adding it back to a P&L that never deducted it is double counting. If the bookkeeper posted the whole Section 179 amount as depreciation, it is on the P&L and the add-back is right, once. MidStreet's guide to adjusted EBITDA lists this among the three errors it sees most, with distributions and pandemic-era credits.

EBITDA, SDE and net income

Net income is what is left after every expense, including your own salary, the interest on the truck loans and whatever depreciation the books carry. It is the least useful of the three to a buyer, because it reflects your financing and your pay rather than the business.

Seller's discretionary earnings, or SDE, is EBITDA plus one owner's full compensation and benefits, plus any personal expenses run through the company. It assumes the buyer is a single owner-operator who will step into your job and take your pay.

MidStreet's guide puts the thresholds where most brokers do: SDE under about $1 million of earnings, EBITDA above about $1.5 million, and either in between. The multiples move with the definition. MidStreet quotes SDE multiples of 2 to 3 times, rising toward 4 as SDE nears $1 million, and EBITDA multiples of 3 to 6 times for companies with $1 million to $2 million of EBITDA.

Add-backs a buyer accepts, and the ones they strike

Adjusted EBITDA is EBITDA with the costs that will not continue under a new owner removed, and the costs that will continue but are missing put in. Every adjustment needs a document.

The add-back that matters most is owner pay above market. MidStreet's example is an owner drawing $300,000 in salary for a job a hired general manager would do for $200,000. The $100,000 difference is the add-back. A spouse on payroll who does not work in the business is an add-back. A personal truck or family health insurance run through the company is an add-back with receipts. A lawsuit settled last year or a move between premises is an add-back if it is genuinely one-time, and a buyer will ask why it will not recur.

The strikes are predictable. Distributions are the most common. They are not on the P&L, so they never reduced net income, and adding them back counts money that was already in the figure. A financed vehicle the buyer inherits along with its payments is not an add-back. Savings that depend on the buyer doing something you did not do, sometimes called synergies, belong to the buyer. And an employee retention credit or forgiven pandemic loan still sitting in other income has to come out, which lowers the number.

The usual advice is to find every add-back you can, and we disagree, because each one the buyer's accountant strikes costs you credibility on the ones that were real, and the striking happens after the letter of intent, when the price is renegotiated.

A worked example

Net income $187,000, interest expense $21,700, depreciation $38,900. Those are the three lines that matter on the twelve-month QuickBooks Online P&L of an HVAC company with 29 staff and $2.4 million of revenue, which carries no amortization and pays no entity-level tax. EBITDA is $187,000 plus $21,700 plus $38,900, or $247,600.

The owner draws $226,000 in salary. A general manager for a company this size would cost about $172,000, so $54,000 comes back. A lawsuit with a former employee settled for $6,200 last spring. The owner's own truck and its insurance cost the company $4,200. Adjusted EBITDA is $247,600 plus $54,000 plus $6,200 plus $4,200, which is $312,000, and SDE is that plus the $172,000 manager's salary, or $484,000.

The owner's first draft came to $341,000, because it added back $29,000 of distributions, which the buyer's accountant removed in a sentence.

At this size the buyer prices on SDE. BizBuySell's rolling industry table, covering businesses sold from the third quarter of 2021 to the first quarter of 2026 as accessed in June 2026, shows HVAC at about 2.83 times cash flow. On $484,000 that is roughly $1,370,000. At 2.8 times the price is $1,355,200, at 3.2 times it is $1,548,800, and the $193,600 between them is what documented add-backs and clean books are worth. The $29,000 that got struck would have been about $82,000 of price at 2.83 times, had it survived.

What businesses are actually selling for

BizBuySell's Insight Report for the first quarter of 2026, released in April, counted 2,345 closed transactions with a median sale price of $350,000, median revenue of $713,404 and median cash flow of $165,256. The median multiple was 2.7 times cash flow, up 3% on a year earlier. Of the buyers, 67% planned to use an SBA loan, and 61% expected seller financing.

These are medians of small deals from one marketplace, and the rolling window shifts each quarter. Treat them as approximate. And cash flow on BizBuySell means SDE-style earnings, so 2.83 on HVAC and 3 to 6 on true EBITDA can both be right. A good profit margin for your industry tells you whether there is much cash flow to multiply in the first place.

When you own more than one company

A buyer values the operating company, not your group. If the operating company pays a management fee to your holding company and rent to your property LLC, both have to be reset to market before anyone computes EBITDA. Rent at $4,000 a month to your own LLC when the building would lease for $7,500 overstates the operating company's EBITDA by $42,000 a year, and a buyer who does not own the building will correct it. Rent is the usual case. A management fee that exists to move profit to the holding company cuts the other way. And revenue from a sibling company is not revenue to a buyer; if the construction company's largest customer is your own property LLC, that work goes when the group does. Intercompany transactions covers how these show up in the books.

How you pay yourself across entities changes the add-backs too, and how much to pay yourself goes through that.

Navigator computes EBITDA and margin for each connected QuickBooks Online company and for the group, on the base plan. On the Pro plan intercompany fees and rent are eliminated in the consolidated view, so the operating company's figure is the one a buyer would compute rather than the one the management fee produced. Plans are on the pricing page.

Why the bank uses it anyway, and when to pay for a real check

EBITDA is a poor cash number. It ignores uncollected receivables, inventory, loan principal and the truck you paid for outright, which is why a company can post $312,000 of adjusted EBITDA and have $31,000 in the bank. Why net income doesn't match your bank balance covers that gap. Lenders use it regardless, because it is easy to compute from a tax return and compare across borrowers. The SBA's rulebook for 7(a) lenders, SOP 50 10 8, tests coverage of 1.15 times against debt service, and the top line of that test starts from EBITDA, which is the connection to debt service coverage ratio.

A quality of earnings report is an outside accountant's review of whether the adjusted EBITDA claimed for a business is real, the add-backs above all. ProjectionHub's 2025 pricing guide puts a QoE at $10,000 to $35,000 for deals between $100,000 and $10 million, and a lighter sniff test at under $1,000. Below about $1 million of price most buyers settle for the sniff test. Above it, expect the full report.

What the method cannot tell you is what a particular buyer will pay. Multiples are medians of other people's deals. Yours depends on how much of the business leaves when you do, which no P&L line measures.

Questions owners ask

How do you calculate EBITDA from a profit and loss statement?

Start with net income at the bottom of the P&L. Add back interest expense, income tax expense, depreciation and amortization, which are usually four separate lines in a QuickBooks Online chart of accounts. If the business is a pass-through and pays no entity-level tax, the tax add-back is zero. Use a full twelve months, and check that depreciation on the P&L is the book figure, not a tax write-off pasted in.

What is the difference between EBITDA and SDE?

SDE, seller's discretionary earnings, is EBITDA plus one owner's full compensation and benefits, plus personal expenses run through the business. It assumes a single owner-operator buyer who will take that pay. EBITDA assumes a manager is hired at market. Brokers use SDE below about $1 million of earnings and EBITDA above about $1.5 million, per MidStreet's guide, with either in between.

What are common EBITDA add-backs?

Owner pay above a market salary for the same job, a spouse or child on payroll who does not work in the business, personal vehicles, travel and insurance paid by the company, and one-time costs such as a lawsuit or a move. Buyers strike distributions, which never reduced net income, financed vehicles the buyer will keep paying for, and savings that depend on the buyer doing something differently.

What EBITDA multiple do small businesses sell for?

BizBuySell's Insight Report for the first quarter of 2026 put the median at 2.7 times cash flow across 2,345 closed sales, with a median price of $350,000. Its rolling industry table runs from about 1.95x for transportation to 3.04x for manufacturing, with HVAC at 2.83x. Those are SDE-style multiples on small deals. Larger companies priced on true EBITDA get higher multiples on a smaller number.

Is owner salary included in EBITDA?

Salary paid through payroll reduces net income, so it is inside EBITDA as a cost. Adjusted EBITDA adds back only the part above what a hired manager would cost. SDE adds back all of it for one owner. Distributions are not on the P&L at all, so they are never an add-back, and a buyer's accountant will strike any attempt to treat them as one.

Related

If the three margins on the P&L are still running together, gross margin vs net margin vs operating margin separates them before you get to EBITDA. Franchise owners have their own version of this number, covered in 4-wall EBITDA for franchises. And since a lender will run the same figure through a coverage test, debt service coverage ratio for business owners shows what it does with it.

If you want EBITDA and margin for each of your companies on the same page every morning, the free trial connects to QuickBooks Online read-only and needs no card: navigatorhq.ai.

Published 8 Jun 2026. Last updated 8 Jun 2026. Reviewed by a CFO on the Navigator team.