The Metric That Once Settled Every Debate

For decades, EBITDA was the number that brought negotiations to a close. Buyers relied on it, sellers defended it, and investment bankers built entire processes around it. The approach was straightforward: identify EBITDA, apply a multiple, and arrive at a value both sides could accept as reasonably objective. It was simple, comparable, and widely understood.

Built for a Different Era

The challenge is that EBITDA was designed for a different kind of business environment. It worked well for companies built on physical assets, stable cash flows, and tangible operations. Manufacturers, distributors, and traditional service firms fit neatly into this framework, where earnings served as a reliable indicator of value.

Today’s economy looks very different. Business models have shifted, but EBITDA has not evolved at the same pace.  

Where EBITDA Falls Short

At its core, EBITDA removes depreciation and amortization, treating them as non-cash accounting adjustments with limited economic significance. For asset-heavy industries, this assumption often holds true.

However, for modern businesses driven by intangible assets such as software, data, and customer relationships, this approach becomes problematic. These assets rarely appear clearly on balance sheets, yet they are central to value creation. By excluding the investments that build and sustain them, EBITDA can present a distorted picture of a company’s true worth.

Markets Have Moved Beyond Traditional Metrics

Market practices are already reflecting this shift. SaaS companies are no longer evaluated using EBITDA. Instead, they are assessed through metrics such as ARR multiples, net revenue retention, gross margin quality, and the Rule of 40, which combines growth rate and profitability.

A SaaS business with net revenue retention above 110% can command valuation multiples that are one to three times higher than peers with weaker retention, regardless of EBITDA performance. 

Similarly, AI infrastructure companies are judged on the strength of their data ecosystems and deployment scale. High-growth consumer platforms are valued based on customer acquisition efficiency and lifetime value. In each of these cases, EBITDA does not capture what truly drives value.

EBITDA:  Relevant, but Not Universally Applicable

This does not mean EBITDA has become irrelevant. For mature, asset-heavy sectors such as manufacturing, logistics, and professional services, it remains a useful and appropriate measure.

The real shift is more nuanced. EBITDA is no longer a universal standard. It was never designed to be applied across every business model, and treating it as such has led to misaligned valuations.

A More Comprehensive Valuation Approach

What replaces EBITDA is not a single alternative metric, but a more accurate understanding that valuation must adapt to the nature of the business. Different industries require different frameworks, and success lies in choosing the right one.

Companies and advisors that perform well in today’s deal environment are those who understand this distinction. Entering a negotiation with the wrong valuation lens is not just an analytical error. It is a strategic disadvantage that can shape the outcome before discussions even begin.