Buyers of a business are purchasing the cash generation capacity of that company, plain and simple. However, legal structure and financing decisions can widely swing the measure of the cash generation capacity of a business.  Here is where EBITDA comes into play.

EBITDA—Earnings Before Interest, Taxes, Depreciation & Amortization—itself is used as the focal profitability and valuation metric because it presents a normalized earnings figure that is independent of who owns the business (i.e., it is operating focused, rather than financing focused). In other words, it is independent of capital structure or tax structure, because it is before non-operating items such as interest and taxes. Since different buyers will often capitalize a company differently (akin to some people take out a mortgage to buy a home while others may pay all cash), this is a reasonable starting point. Furthermore, it is before non-cash items, specifically before depreciation and amortization expense, so conceptually, it is more of a cash earnings or cash flow-centric measure. From a valuation standpoint, EBITDA is often used as a proxy (sometimes a poor proxy) for free cash flow (“FCF”), thus is it commonly used as a convenient valuation benchmark (i.e., valuations are often discussed as a multiple of EBITDA).