What Is EBITDA? A Plain-English Guide for Contractors

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is the number that determines what your home services business is worth when you go to sell it, and it is the number that every PE buyer, banker, and serious acquirer will ask about within the first five minutes of looking at your company.

If you run a $5M to $30M HVAC, plumbing, electrical, or roofing company and your eyes glaze over when someone mentions EBITDA, this guide is for you. No jargon, no theory. Just what it means, how to calculate it, and why it matters more than any other number on your financial statements.

EBITDA in One Sentence

EBITDA is how much cash your business generates from operations before accounting for how it is financed, how it is taxed, and how its assets are depreciated. It strips out the noise and shows the core earning power of your company.

Think of it this way. Two identical HVAC companies doing $10M in revenue with the same margins will have very different net income if one has $2M in debt and the other is debt-free. Net income penalizes the first company for its debt payments. EBITDA ignores the debt and asks a simpler question: how much money does this business generate from running the business?

That is why buyers use EBITDA instead of net income. They will bring their own financing, their own tax strategy, and their own depreciation schedules. They want to know what the business earns on a standalone basis.

How to Calculate EBITDA

There are two ways to get to EBITDA, and they should give you the same number.

Method 1: Start from the bottom. Take your net income and add back interest expense, income taxes, depreciation, and amortization. This is the textbook formula.

Method 2: Start from the top. Take your revenue, subtract cost of goods sold (COGS), subtract operating expenses. Do not subtract interest, taxes, depreciation, or amortization. What is left is EBITDA.

For a home services company, here is what a simplified calculation looks like. Say you are an HVAC company doing $8M in revenue with $4.4M in COGS and $2.8M in operating expenses. Your operating income is $800K. Your depreciation on trucks and equipment is $200K (the IRS Publication 946 covers depreciation rules if you want the technical details). Your interest on a line of credit is $60K. Your EBITDA is $800K plus $200K plus $60K, which equals $1.06M.

Notice that EBITDA is higher than operating income because it adds back the depreciation. And it is higher than net income because it also adds back interest and taxes. This is by design. EBITDA is supposed to show the total cash flow available before financing and tax decisions.

One important nuance for contractors: depreciation is often baked into your operating expenses rather than broken out as a separate line item. Your accountant may run truck depreciation, equipment depreciation, and tool depreciation through OpEx categories instead of a dedicated depreciation line. When you are calculating EBITDA, you need to find every depreciation charge on your P&L and add it back, even if it is buried inside a line item called Vehicle Expense or Equipment Costs. If you miss it, you are understating your EBITDA, which means you are understating your company valuation. Pull your depreciation schedule from your accountant and cross-reference it against your P&L to make sure nothing is hiding.

Why EBITDA Matters When You Sell Your Business

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Your business value is calculated as EBITDA multiplied by a valuation multiple. If your EBITDA is $1M and the market multiple for your type of business is 6x, your business is worth approximately $6M.

This is why EBITDA is so important. It is literally the base number that your entire company valuation is built on. Every dollar you add to EBITDA gets multiplied by 5x, 6x, 7x, or more when you sell.

A $5M revenue HVAC company with $500K EBITDA at a 5x multiple is worth $2.5M. If that same company improves operations to generate $800K EBITDA and earns a 6x multiple (because better margins signal a better business), it is now worth $4.8M. The owner did not double revenue. They added $300K in annual earnings and earned a higher multiple, and the result was $2.3M more in their pocket at closing.

This is why we tell every client: do not obsess over revenue growth. Obsess over EBITDA growth. A $10M company with $600K EBITDA is worth less than an $8M company with $1.2M EBITDA.

EBITDA vs. Net Income: Why Contractors Get Confused

Most home services business owners look at net income on their P&L and think that is their profit. It is, but it is the wrong number for valuation purposes.

Net income includes a lot of items that are specific to how YOU run the business, not how the business performs. Your interest expense depends on how much debt you carry. Your taxes depend on your tax strategy and entity structure. Your depreciation depends on when you bought your trucks and how your accountant chose to depreciate them.

A buyer does not care about any of that. They will replace your debt with their own. They have their own tax structure. They will set their own depreciation schedules. They want to see EBITDA because it shows what the business earns independent of those owner-specific decisions.

Here is a common scenario. A contractor looks at their P&L and sees $300K in net income on $6M in revenue and thinks the business is not worth much. But when you add back $150K in depreciation, $80K in interest, $120K in taxes, and $200K in owner add-backs (personal expenses run through the business, above-market salary, one-time costs), the adjusted EBITDA is $850K. At a 5x to 6x multiple, that is a $4.25M to $5.1M business. Very different story than the $300K in net income suggested.

Adjusted EBITDA: What Buyers Actually Look At

Raw EBITDA from your P&L is the starting point, but buyers will adjust it. This is called adjusted EBITDA or normalized EBITDA, and it is what actually determines your valuation.

Common adjustments for home services companies include owner compensation above market rate (if you pay yourself $400K but a replacement GM would cost $200K, the $200K difference gets added back), one-time expenses (a $50K lawsuit settlement, a $30K truck accident, a $20K software implementation), personal expenses run through the business (your truck lease, your cell phone plan, your spouse on payroll for a no-show job), and rent below or above market rate if you own the building your business operates from.

These adjustments can dramatically change your EBITDA. We routinely see contractors whose reported EBITDA is $500K but whose adjusted EBITDA is $800K to $1M once you properly account for all the add-backs. That difference is worth $1.5M to $3M in enterprise value.

The flip side is that buyers will also make negative adjustments. If you have been deferring truck replacements, they will subtract the capital expenditure needed to refresh the fleet. If you have been underpaying technicians relative to market, they will subtract the wage increases needed to retain the team. Everything cuts both ways.

What Is a Good EBITDA Margin for Home Services?

EBITDA margin is EBITDA divided by revenue, expressed as a percentage. It tells you how much of every dollar in revenue you are keeping as earnings before financing and taxes.

For home services companies in the $5M to $30M range, here are the benchmarks we see across our client base. HVAC companies running a healthy mix of service, replacement, and maintenance should target 15% to 20% EBITDA margins when well run. Plumbing companies running service and drain work should target the same range, 15% to 20%. Electrical contractors can run higher because of lower material costs relative to labor, typically 20% to 25% for a well-managed operation. Roofing companies, because of their higher material costs and subcontractor usage, typically run 13% to 15% EBITDA margins even when well run. If you are below these ranges, you are not necessarily doing something wrong, but there is margin available. Most contractors we work with are running 5 to 8 points below these benchmarks when we first see their books.

If your EBITDA margin is below 10%, a buyer will see a business that needs operational improvement before it is attractive. Between 10% and 15% is where most contractors land. Above 15% signals a well-run operation for HVAC and plumbing, and you will start earning a premium multiple. Above 20% is strong for any trade and typical of electrical contractors with disciplined operations. Keep in mind these are ideals. The majority of home services companies we see on first engagement are running well below these numbers.

How to Improve Your EBITDA

There are three levers: increase revenue without proportionally increasing costs, reduce COGS as a percentage of revenue, or reduce operating expenses as a percentage of revenue.

For home services companies, the highest-impact EBITDA improvements usually come from improving technician productivity (more revenue per tech per day), optimizing pricing and reducing discount leakage, tightening material markup and reducing waste, eliminating overhead that does not drive revenue (subscriptions, redundant software, overstaffed admin), and shifting revenue mix toward higher-margin service and replacement work versus lower-margin install or new construction.

The average home services company has 5 to 8 percentage points of margin improvement available without making radical changes. On an $8M company, 6 points of margin improvement adds $480K to EBITDA. At a 6x multiple, that is $2.88M in additional enterprise value.

The One-Page EBITDA Cheat Sheet

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization.

Adjusted EBITDA = EBITDA + owner add-backs + one-time costs – deferred expenses.

Business value = Adjusted EBITDA x valuation multiple.

Valuation multiples for home services typically range from 3x to 8x depending on size, growth, margins, recurring revenue, and management team depth.

EBITDA margin benchmarks: Below 10% needs work, 10% to 15% is where most contractors land, 15% to 20% is well run for HVAC and plumbing, 20% to 25% for electrical, 13% to 15% for roofing.

Every dollar you add to EBITDA gets multiplied when you sell. That is why this number matters more than revenue, more than net income, and more than any other metric on your financial statements. Know your EBITDA, know what drives it, and know what a buyer would adjust it to.

Related: Residential vs. Commercial Contracting: Financial Differences That is the starting point for every serious conversation about your company’s value.

What Is EBITDA? A Plain-English Guide for Home Services Contractors

EBITDA in One Sentence

How to Calculate EBITDA

Why EBITDA Matters When You Sell Your Business

EBITDA vs. Net Income: Why Contractors Get Confused

Adjusted EBITDA: What Buyers Actually Look At

What Is a Good EBITDA Margin for Home Services?

How to Improve Your EBITDA

The One-Page EBITDA Cheat Sheet

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