How to Truly Increase EBITDA

Quick answer

EBITDA is earnings before interest, taxes, depreciation and amortization, and it is the number most buyers multiply to arrive at what your business is worth. Because value is EBITDA multiplied by a multiple, every dollar you add to EBITDA is worth several dollars at sale. That is why owners chase it. The catch is that not all EBITDA is treated equally. Earnings produced by a one time cost cut, a deferred expense, or an unusually good year get normalized away by any competent valuator. The EBITDA that raises your value is the kind that is repeatable, provable, and does not depend on you. This is about building that kind.

Key takeaways

• Value is EBITDA multiplied by a multiple, so a dollar of durable EBITDA is worth the multiple in enterprise value. At 4x, an extra $100,000 of earnings is $400,000 of value.
• Price is the fastest lever and the one owners are most reluctant to pull. It falls straight to the bottom line with no additional cost.
• Cost cutting works once and is easy for a buyer to discount, especially if it looks like deferred investment.
• Mix matters as much as margin. Shifting revenue toward contracted work raises both the earnings and the multiple applied to them.
• Cutting things that make the business run without you is a false economy, because it lowers the multiple while raising the earnings.
• Earnings need two clean years of history to count, because lenders test coverage on the last fiscal year or an average of the last two.

Why EBITDA is worth more than it looks

Start with the arithmetic, because it is the reason this matters.

If your business is valued at 4x EBITDA, then finding $100,000 of durable annual earnings does not make you $100,000 richer. It makes you $400,000 richer at sale, and you keep the $100,000 a year in the meantime.

That leverage runs both ways. A $50,000 expense you never questioned is costing you $200,000 of enterprise value at the same multiple. Owners who have never thought about their business this way tend to find the first hundred thousand faster than they expect once they do.

The difference between EBITDA and EBITDA a buyer will pay for

Here is where most of the effort gets wasted.

A buyer, and the valuator working for their lender, is trying to establish what this business will reliably earn under new ownership. They are not interested in your best year. They are interested in your normal year.

So they will adjust. A cost you cut by deferring maintenance gets added back, because the maintenance is still coming. Marketing you stopped spending gets scrutinized, because the pipeline it was feeding will thin. A one time contract that inflated a year gets normalized out. Your own below market salary gets replaced with what it would cost to hire someone to do your job.

The earnings that survive all of that are the earnings you get paid for. Everything else is decoration, and building it wastes the time you had available.

Lever one: raise your prices

This is the highest return action available to most small businesses and the one owners resist hardest.

A price increase has no cost of delivery attached. If you raise prices 5 percent and hold volume, essentially all of that increase lands in EBITDA. On a business doing $2 million in revenue with $300,000 of EBITDA, a 5 percent increase adds $100,000 of revenue and roughly $100,000 of earnings, taking EBITDA to $400,000. At a 4x multiple that is $400,000 of additional value, from a decision rather than an investment.

The fear is losing customers. It is worth being precise about what you can afford to lose. If your gross margin is 60 percent and you raise prices 5 percent, you can lose around 8 percent of your volume before you are worse off in gross profit terms. Most businesses that have not raised prices in years lose far less than that, and the customers they lose tend to be the least profitable ones.

Underpricing does not just cost you margin. It compounds into the valuation.

Lever two: fix the mix, not just the margin

Two businesses with identical EBITDA can be worth very different amounts if their revenue is shaped differently.

Contracted or recurring revenue commands roughly one to two turns of EBITDA more than comparable project or one time revenue. That is the difference between a 3x and a 5x on the same earnings.

So moving revenue from one column to the other does something no cost cut can do. It raises the earnings and the multiple at the same time. A maintenance agreement attached to installation work, an annual retainer replacing ad hoc billing, a service plan sold alongside the product: each of these converts unpredictable revenue into predictable revenue.

Retention decides whether you keep the premium. Above roughly 90 percent annual retention with contract tails of a year or more, it holds. Below about 80 percent, it erodes, and churn above 10 percent a year compresses the multiple regardless of what the agreements are called.

Lever three: sell more to the customers you already have

Acquiring a new customer costs money. Selling more to an existing one usually does not, which means the incremental revenue arrives at a much higher margin and drops further into EBITDA.

This is also the safest way to reduce customer concentration, because you are growing the rest of the base rather than trying to shrink your largest account. If your biggest customer is 35 percent of revenue, the answer is rarely to fire them. It is to make everyone else bigger until they are 18 percent of a larger number.

That single change moves you out of the range where valuators apply a material discount, and it does it while increasing earnings.

Lever four: cut cost, but cut the right cost

Cost reduction is real and it belongs on the list. It is simply the lever with the shortest runway and the most scrutiny attached.

Genuine cost improvements survive diligence. Renegotiated supplier terms, a subscription stack nobody has audited in three years, insurance and merchant processing that has not been to market, overtime driven by poor scheduling, waste and rework in delivery.

What does not survive is cutting things whose absence a buyer can see coming. Deferred maintenance. Killed marketing. A hiring freeze that leaves the team stretched. Training and systems investment that was holding the business together. All of these raise this year’s EBITDA and lower what a buyer will pay for it, because the buyer knows they are funding the catch up.

The test is simple. If the cost has to come back within a year of a new owner arriving, it is not a saving. It is a loan against your own sale price.

Lever five: reduce the cost of you

This one is counterintuitive because it can reduce EBITDA on paper while raising the value of the business.

If you are working sixty hours a week for a below market salary, your earnings are flattered by the difference. A valuator will normalize it, replacing your compensation with the market cost of hiring your replacement. Owners are often startled by how much that adjustment takes out.

Meanwhile, being essential compresses the multiple. Owner dependence is one of the largest discounts in small business valuation, because a buyer purchasing a business that only works with you in it is purchasing a job with uncertainty attached.

Hiring a general manager might reduce reported EBITDA by their salary. It can still raise the value of the business, because the earnings that remain are earnings a buyer can actually keep. Run the arithmetic before you assume the cost is not worth it.

Lever six: make the earnings provable

The most under-appreciated work is not producing earnings. It is being able to demonstrate them.

Financial statements that tie to your tax returns. Add-backs documented as they occur, with invoices, rather than reconstructed from memory during diligence. Consistent treatment across years. A clean general ledger. Monthly reporting you actually look at.

Earnings you cannot prove get discounted or discarded. Revenue that never touched the books cannot be counted at all by a lender being asked to lend against it, which is why keeping income off the P&L is such an expensive way to save tax. The tax you avoid is a fraction of what you lose, multiplied.

Give it two years, because that is the window that counts

There is a timing constraint that decides how much of this you can capture.

Lenders test whether a business can service acquisition debt using the last fiscal year end, or an average of the last two, on a historical or adjusted basis. They are not permitted to rely on projections of what the business will do after closing.

So improvements made this quarter do not count for much. Improvements that have been in place for two full fiscal years are in the numbers a lender is allowed to use. That is the practical reason preparation is measured in years, and it is why owners who decide to sell and then start improving are usually a year and a half too late.

A worked example

A commercial services business does $2 million in revenue with $300,000 of EBITDA. The business is valued at 3.5x because the largest customer is 34 percent of revenue and the owner personally runs estimating and client relationships. That is $1.05 million.

Over two years the owner does four things. Raises prices 5 percent, adding about $100,000. Converts the top twenty accounts to annual agreements. Grows the rest of the customer base until the largest account is 19 percent of revenue. Hires a general manager at $90,000 to take over operations and client relationships.

EBITDA goes to $310,000. The price increase adds $100,000, the general manager costs $90,000. That is barely any growth in earnings at all.

But the multiple moves. Concentration is out of the penalty band. The revenue base is largely contracted. The business runs without the owner. At 5x, it is worth $1.55 million.

Earnings rose 3 percent. Value rose 48 percent. The multiple did the work, and every lever that moved it also made the business better to own in the meantime.

Those figures are illustrative rather than a specific transaction, but they show why chasing EBITDA in isolation is the wrong frame.

Frequently asked questions

What is the difference between EBITDA and SDE?

SDE, or seller’s discretionary earnings, includes the owner’s compensation and is used for smaller owner operated businesses. EBITDA treats management as a cost and is used for larger businesses that have one. The multiples applied to each are different, so a 3x SDE business and a 3x EBITDA business are not comparable.

How quickly can I increase EBITDA?

Pricing can move within a quarter. Mix, concentration and owner dependence take one to three years. Because lenders test on the last one or two fiscal years, the improvements that count toward your sale price need to be in place well before you go to market.

Does cutting my own salary increase the value of my business?

No. A valuator will normalize your compensation to what it would cost to replace you, so an artificially low salary is added back. It inflates reported earnings without changing what the business is worth.

Is it better to grow revenue or improve margin?

Margin improvement usually wins on a per dollar basis because it carries no delivery cost, but the highest return work is often neither. Changing the shape of your revenue raises the multiple as well as the earnings, and the multiple is applied to everything.

Should I hire a manager if it reduces my profit?

Frequently yes. Owner dependence is one of the steepest discounts in small business valuation. If a $90,000 hire moves you from 3.5x to 4.5x on $300,000 of earnings, you have traded $90,000 of annual profit for several hundred thousand dollars of enterprise value.

Put the right number to work

Want to know your SDE, EBITDA, and value? Get a free estimate, or request a certified valuation from Bridge.

About Bridge. Bridge helps small business owners value, scale, and exit with confidence. Certified valuations are prepared by ABV and AICPA credentialed experts, delivered for a flat $1,999 in 3 to 5 business days, and are SBA-compliant. The team has served 300+ businesses and supported more than $1B in M&A transactions. Learn more at bridge.financial.

This article is educational and not financial, legal, or tax advice. For a number specific to your business, request a certified valuation.