I came across a cool posting on LinkedIn. Bradley Lay, an equity private investor shared his thoughts about EBITDA and why it is not the right way to value a business. In his post, Lay didn’t hold back about it. Somehow this drives him crazy. While big numbers in EBITDA can make any business look fantastic on paper, he warns that if you’re valuing your business using it, you’re already setting yourself up for a big disappointment.
He shared a recent experience where he sat across from a guy who was convinced his piling company was worth £14M. “We’re doing £2M EBITDA,” the owner proudly declared, “so at a 7x multiple…” Lay had to stop him right there, knowing exactly how this story would end.
He referenced the late Charlie Munger, Warren Buffett’s brilliant business partner who recently passed away, who had the perfect take on this. Munger used to say, with his characteristic bluntness, that every time you see the word EBITDA, you should substitute it with “bullshit earnings.” Harsh? Maybe. But Munger wasn’t known for sugar-coating the truth.
What particularly frustrates Lay is how EBITDA casually ditch away crucial costs like they’re nothing. Depreciation represents real money spent on equipment wear and tear. Tax obligations are inevitable unless you’ve found some magical way to avoid them. And then there’s the reality of debt costs and equipment replacement – machinery doesn’t last forever, and those finance payments don’t pay themselves.
Lay shares in the post a harsh truth that every business owner like us needs to hear—a business is worth exactly what someone is willing to pay for it. Not a dollar more, not a dollar less. Private equity investors usually look at net profit before tax (usually applying a multiple between 1.5x to 3.5x), add in net assets and free cash, and subtract liabilities. The usage of that multiple of 1.5x to 3.5x truly depends on factors like management team strength, client diversification, recurring revenue, growth potential, and sector dynamics.
Returning to that piling business example, once he dug into the real numbers, the £500K net profit before tax brought the true value closer to just approximately £1M. This dramatic difference emerged because the business needed constant investment in new machinery and was juggling finance agreements. That’s a £13M reality gap, enough to be a showstopper.
Lay emphasises this simple truth: Revenue is like vanity. It might make you feel good, but it doesn’t tell the whole story. Adjusted EBITDA is pure fantasy, it’s what you wish was true. But net profit before tax? That’s your reality check, and the numbers don’t lie. So his message is clear. Stop getting caught up in fancy numbers. Face the real numbers head-on. Yes, they might not paint as pretty a picture as EBITDA, but they’ll give you something much more valuable—the truth.
Image—bradleylay.com
