EBITDA is one of the most commonly referenced metrics in restaurant transactions — and one of the most misunderstood.
Many operators focus on maximizing EBITDA, assuming it directly translates to higher valuations. In practice, buyers and investors dig much deeper.
In this article, we’ll explain the difference between EBITDA and cash flow, how each is used in restaurant deals, and why understanding both changes negotiation outcomes.
What EBITDA Measures — and What It Doesn’t
EBITDA measures operating performance before financing and accounting structure.
It allows buyers to compare businesses on a normalized basis, but it does not represent spendable cash.
Why Cash Flow Ultimately Drives Value
Cash flow determines what a buyer can actually take out of the business.
Debt service, capital expenditures, and working capital needs all reduce available cash — even when EBITDA looks strong.
Common EBITDA Adjustments in Restaurant Deals
- Owner compensation normalization
- One-time or non-recurring expenses
- Personal expenses run through the business
Adjustments require credibility. Unsupported add-backs often lead to buyer skepticism.
Capital Expenditures Matter
Restaurants are capital-intensive businesses.
Equipment replacement, remodels, and maintenance consume cash that EBITDA ignores.
Working Capital Is Not Free
Inventory, payroll timing, and payables structure affect real cash availability.
Buyers evaluate how much cash must remain in the business to sustain operations.
Why Buyers Care About Both Metrics
EBITDA frames valuation discussions. Cash flow determines deal feasibility.
Strong deals align both — healthy EBITDA supported by durable cash generation.
Clarity Improves Negotiation Outcomes
Confidence comes from understanding the full financial picture.
Restaurants that clearly articulate EBITDA adjustments and cash flow realities negotiate from a position of strength.
Final Thought
EBITDA opens the conversation. Cash flow closes the deal. Restaurants that understand both metrics protect valuation and reduce surprises during diligence.
References
Investment Banking Resources. EBITDA and valuation methodologies.
Harvard Business Review. Cash flow vs earnings analysis.
National Restaurant Association. Restaurant transaction insights.
