Why EBITDA Isn’t Everything: The Metrics That Actually Drive Long-Term Value

If you’ve spent any time in M&A, you’ve probably heard this phrase a hundred times: “What’s the EBITDA multiple?”

It’s a fair question—EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a useful metric. It’s a fast way to compare valuations, benchmark deals, and gauge profitability.

But here’s the problem: focusing too much on EBITDA can cause you to overlook what actually drives long-term value in a business.

If you’re acquiring a company, you need to dig deeper. Here are the key metrics that matter just as much—if not more—than EBITDA.

1. Cash Conversion Cycle (CCC) – How Fast Does the Business Turn Revenue into Cash?

A company can show strong EBITDA but still struggle with cash flow. The cash conversion cycle (CCC) measures how quickly a business turns its investments (inventory, receivables) into cash.

A negative CCC (where the company gets paid by customers before it pays suppliers) is a massive advantage. Businesses like SaaS, insurance, and e-commerce marketplaces often operate this way—fueling growth with customer cash instead of debt.

On the flip side, a long CCC (where cash is tied up for months in inventory or unpaid invoices) can turn even a high-EBITDA company into a financial headache.

?? Example: Two companies each have $3M in EBITDA. One has a negative CCC and requires almost no working capital to operate. The other has $2M tied up in inventory at any given time. Which one is more valuable?

2. Revenue Quality – Is It Recurring, Sticky, or Transactional?

Not all revenue is created equal. When evaluating a business, look beyond topline numbers and ask:

• Is revenue recurring or project-based? Subscription and contract revenue is worth far more than one-off sales.
• Is customer churn low? A high churn rate means you’re constantly replacing lost revenue, making growth harder.
• How concentrated is the revenue? If 50% of sales come from one or two customers, you’re exposed to serious risk.

A business with stable, diversified, and recurring revenue will always command a higher multiple—regardless of EBITDA.

?? Example: A digital marketing agency with $2M EBITDA, but all revenue comes from short-term projects. Compare that to a niche software company with $1.5M EBITDA, but 90% of its revenue is locked in through annual contracts. The software company will likely sell for a higher multiple, even with lower EBITDA.

3. Gross Margins – How Profitable is Each Sale?

EBITDA shows overall profitability, but gross margin tells you how efficiently the business operates at its core. A company with high gross margins can afford to invest in growth without relying on constant external funding.

If a business is generating strong EBITDA on thin gross margins, a small increase in costs (labor, materials, supply chain) can wipe out profits. Always analyze gross profit as a percentage of revenue—it’s a leading indicator of sustainability.

?? Example: Two companies both generate $5M in revenue. One has a 70% gross margin, the other has a 30% margin. The first company keeps far more of every dollar, making it more resilient and valuable long-term.

4. Customer Acquisition Cost (CAC) vs. Lifetime Value (LTV) – Is Growth Efficient?

Growth isn’t just about selling more—it’s about acquiring and retaining customers at a cost that makes sense. The LTV:CAC ratio tells you whether a business is spending its marketing dollars wisely.

• If CAC is too high relative to LTV, the company is burning cash to grow.
• If CAC is low and LTV is high, the business has strong customer retention and a cost-efficient growth model.

Many high-EBITDA businesses fail because they don’t have a repeatable way to acquire and retain customers profitably.

?? Example: A subscription box company spends $200 to acquire a customer who only spends $250 before churning. That’s not sustainable. But a B2B software firm that spends $500 to acquire a customer who stays for 5 years and generates $10,000? That’s a high-value business.

5. Owner Dependence – Can the Business Run Without the Seller?

A business can have great EBITDA, strong revenue, and high margins—but if the owner is critical to daily operations, it’s a risky acquisition. The best businesses have systems, teams, and processes in place that make them transferable.

If the company’s success depends on one person, you’re not buying a business—you’re buying a job.

?? Example: Two HVAC businesses both generate $1M EBITDA. One has a strong management team and documented processes. The other is run by an owner who personally handles sales, scheduling, and vendor relationships. The first business will sell for a higher multiple because it doesn’t require an experienced operator to step in.

The Takeaway

EBITDA is important, but it’s just one piece of the puzzle. The best acquisitions are built on:

• Strong cash flow, not just paper profits
• Recurring, diverse, and sticky revenue streams
• High margins that protect against economic shifts
• A scalable and repeatable customer acquisition model
• A business that runs without heavy owner involvement

Buyers who focus only on EBITDA miss out on what really drives value. The ones who look deeper—and buy the right fundamentals—win bigger in the long run.

Looking at acquisitions in 2025? Let’s talk about how to analyze the real value behind the numbers.

-Matt?