Which "TAXES"​ should be included in EBITDA? (2024)

When it comes to valuing a company, one common methodology many use is calculating a company's "EBITDA" and applying a “Market Multiple” to arrive to the value of the company.While there are several factors that come in to determining the right “Market Multiple” to use, the purpose of this post is to talk about EBIDTA; and more specifically the TAXES section of the EBITDA equation.

Let's begin with some Valuation 101 – To make sure we are on the same page. EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization.Therefore, the EBITDA equation is as follows:

Net Profit + Interest + Taxes + Depreciation + Amortization = EBITDA

I come across many who are confused with the "TAXES" section of this equation.Which Taxes are meant to be in the EBITDA equation?Why are taxes plural?What taxes are to be added back to earnings?Here is the answer…

Taxes to Add Back

Generally speaking, for US based companies, taxes (in the context of EBITDA) represent state and federal income tax.It is typical for these taxes to be listed on the Profit & Loss statement for companies, sometimes labeled “Provisions for Income Taxes”.Because this one line item makes up both state and federal taxes (and in some cases where companies have multiple locations in multiple states, several state taxes) it’s appropriate for the word to be plural.

What Taxes to NOT Add Back

All other business related taxes are generally considered operating expenses.Typically, these type of taxes include, but are not limited to, Real & Personal Property Tax, Payroll Tax, Use Tax, City Tax, Local Tax, Sales Tax, etc.These are the types of taxes that are not part of the EBITDA calculation.

When I have discussions around business valuation, there are two items that are often miscalculated by many: Cash Flow and Market Multiple or Cap Rate. If you miscalculate the cash flow (in the above scenario, cash flow being EBITDA) then your valuation will not be accurate. In the event you miscalculate the appropriate market multiple or cap rate, your valuation will not be accurate. In the event you miscalculate both, your valuation will REALLY not be accurate.

Conclusion... be sure you know what you are doing when calculating the value of a company. If you do not know what you are doing, its ok. Just simply ask for assistance.

About the Author: Joe Braier is a certified business valuation analyst with the NACVA. He performs certified business valuations for banks per SBA regulations, partnership disputes, divorce, estate planning, buy/sell agreements, and much more. Joe is also a mergers and acquisition advisor and assists business owners develop an exit strategy to sell their on-going business. If you would like to contact Joe, he can be reached via phone at 414-429-3615.