Why Investors Use EBITDA
EBITDA removes the distortion of depreciation (which varies by accounting policy), amortisation (which depends on acquisition history), interest (which reflects financing choices), and taxes (which vary by jurisdiction). This makes it easier to compare operating performance across companies.
For M&A, EBITDA multiples (Enterprise Value / EBITDA) are a standard valuation shorthand. A SaaS company valued at "10× EBITDA" means the acquirer is paying 10 times the annual EBITDA. Understanding your EBITDA multiple relative to comparable companies tells you how the market is pricing your business.
EBITDA vs Free Cash Flow
EBITDA is not the same as free cash flow. EBITDA ignores: (1) changes in working capital (accounts receivable, payable, inventory); (2) actual capital expenditures — the cash spent on fixed assets that depreciation eventually charges against; (3) the cash cost of servicing debt (interest and principal). For businesses with significant CapEx or working capital needs, EBITDA overstates true cash generation.
EBITDA in SaaS Valuations
For high-growth SaaS companies, EBITDA multiples are less relevant than ARR multiples because most growth-stage SaaS companies have negative EBITDA. As SaaS companies mature and approach profitability, the market increasingly focuses on EBITDA multiples alongside ARR multiples.
The "Rule of 40" (revenue growth rate + EBITDA margin ≥ 40%) is a common SaaS benchmark that balances growth and profitability. A company growing 50% YoY with −10% EBITDA margin scores 40 — the same as a company growing 20% with 20% EBITDA margin.
20–30%
Target EBITDA margin for profitable SaaS
8–15×
Typical EBITDA multiple for private SaaS M&A
Rule of 40
Growth + EBITDA margin ≥ 40 = healthy SaaS
FCF < EBITDA
EBITDA always overstates cash flow by CapEx + WC