Definition and fundamentals of EBITDA
Das EBITDA (English: “Earnings Before Interest, Taxes, Depreciation and Amortization”) refers to a financial metric that measures a company’s operating result before deduction of interest, taxes, as well as depreciation on tangible and intangible assets. In German-speaking countries, EBITDA is often used as an indicator of a company’s operational performance, as it presents economic success independently of financing structure, tax environment, and accounting-related depreciation.
EBITDA should not be confused with the related terms EBIT (“Earnings Before Interest and Taxes”) and EBT (“Earnings Before Taxes”), as these metrics include or exclude different components.
Composition and calculation
EBITDA is calculated based on the profit and loss statement (P&L):
Formula:
[ text{EBITDA} = text{Net profit for the year} + Interest + Taxes + Depreciation on tangible and intangible assets ]
Alternatively, EBITDA can also be derived from EBIT by adding to this value the depreciation on tangible and intangible assets.
Typically, EBITDA is shown as a subtotal in external reporting to highlight a company’s operational earning power before any balance-sheet or financing related distortions.
Legal classification of EBITDA in Germany
Significance under accounting law
Under German commercial law, EBITDA is not a statutory term within the meaning of the German Commercial Code (HGB). Nevertheless, the metric is regularly used in the preparation of annual reports, investor communication, and company valuations. The HGB generally obliges reporting companies to apply the structure scheme (§ 275 HGB), which does not explicitly mention EBITDA. The determination of EBITDA is therefore voluntary and can be included in the notes or management report.
For listed companies, EBITDA is often part of voluntary reporting as part of quarterly and annual financial statements. In this context, the presentation and calculation of EBITDA must comply with the requirements of clarity and transparency, as well as Section 264 (2) HGB and International Financial Reporting Standards (IFRS). Additionally, explanations regarding the composition of any alternative performance measures (APM) are required to ensure transparency for investors and creditors.
Tax treatment
EBITDA serves as an indirect benchmark for determining earning power and debt servicing capacity in tax contexts. In German tax law, the metric mainly plays a role in connection with lending and rating procedures. Tax regulations (e.g., interest limitation rule pursuant to § 4h EStG) use EBITDA as a reference value to limit the deductibility of interest expenses for companies. Specifically, interest expenses can only be deducted as business expenses up to 30% of taxable EBITDA, giving EBITDA tax-regulatory significance. The precise tax definition of EBITDA may differ from its commercial or international calculation.
Corporate and insolvency law aspects
In corporate law, EBITDA is regularly used for company valuation, for example in the context of share purchase agreements (share deals, asset deals) or in capital measures. Purchase price components are often based on an EBITDA multiple, especially in negotiations between companies and investors.
In insolvency law, EBITDA may be drawn upon to assess a debtor’s insolvency status or as part of a going-concern forecast. It is a central metric when preparing insolvency plans or restructuring concepts under IDW S6. In this context, EBITDA serves as an indicator of the ability to generate ongoing payments as part of the restructuring efforts.
EBITDA in international legal comparison
IFRS and US-GAAP
At the international level, EBITDA is also not a metric explicitly defined by International Financial Reporting Standards (IFRS) or US-GAAP. However, voluntary disclosure as a “non-GAAP measure” is widespread and subject to certain disclosure requirements. Companies are obliged to explain the alternative performance metrics used and disclose their composition, in order to ensure comparability and transparency for investors. These regulatory requirements apply especially to publicly listed companies.
European company law and capital market regulation
In the European context, the EU Transparency Directive and the ESMA Guidelines on Alternative Performance Measures require listed companies to provide a transparent and consistent calculation and explanation of EBITDA in business reports, to prevent misleading investors. In Germany, these provisions are monitored by the Federal Financial Supervisory Authority (BaFin).
Areas of application and practical relevance under law
Company valuation and M&A transactions
As part of company valuations and in mergers & acquisitions (M&A), EBITDA serves as the starting point for determining company values (e.g., in the multiplier approach). Objective determination of EBITDA is of central importance, as it affects the purchase price, earn-out arrangements, and warranty promises in share purchase agreements.
Loan agreements and covenants
In financing agreements, EBITDA is often used as a financial metric to set covenants (contractual clauses). For example, certain leverage limits (leverage ratio) may refer to the ratio between net financial debt and EBITDA. Breach of such covenants can have significant legal consequences, such as early loan repayment or additional collateral requirements.
Risks and criticisms from a legal perspective
- Accounting policy discretion: Since the definition of EBITDA is not set by law, there is significant discretion regarding its calculation. Companies can influence the result by excluding additional types of expenses or income (so-called “Adjusted EBITDA”), which may impair comparability and transparency.
- Disclosure obligations: The use of modified or adjusted EBITDA obliges companies to provide detailed and truthful explanations in the notes or management report. Insufficient information may give rise to liability risks.
- Legal uncertainty regarding earn-out clauses: In share purchase agreements where the purchase price is tied to future EBITDA, risks may arise relating to the definition and determination of EBITDA. Unclear or ambiguous contractual provisions can lead to disputes.
- Contract interpretation: If the calculation methodology is not contractually specified, recognized accounting standards and generally accepted accounting principles (GoB) must be referred to in the event of a dispute, with the parties regularly providing expert opinions on EBITDA determination.
Literature (selection)
- BaFin: Notes on the use of alternative performance measures (APM)
- IDW Statement: Company valuation and business administration fundamentals
- § 4h EStG (interest barrier rule)
- ESMA Guidelines on Alternative Performance Measures
Conclusion
EBITDA is an international metric of considerable practical and legal significance. Despite the lack of a statutory definition, EBITDA is recognized in various legal systems and plays a central role in business reports, company valuations, and the setting of contractual terms. However, its use requires a precise knowledge of corporate and tax law requirements as well as a transparent and comprehensible methodology in order to minimize liability and value-related risks.
Frequently asked questions
How is the permissibility of using EBITDA in annual financial statements legally regulated?
Under German commercial law, especially the HGB, “EBITDA” (Earnings Before Interest, Taxes, Depreciation and Amortization) is not a legally defined term and is thus not an explicit part of the classification guidelines for commercial balance sheets or profit and loss accounts (§§ 266, 275 HGB). Nevertheless, EBITDA—especially in notes or management reports—may be disclosed voluntarily, provided that such disclosure complies with the principles of proper accounting. This means the presentation must be clear, comprehensible, truthful, and not misleading. For listed companies, the presentation of EBITDA is additionally governed by IFRS requirements and the ESMA guidelines on alternative performance measures. Improper use or emphasis over statutory metrics may be deemed a violation of clarity and transparency requirements (§ 264 (2) HGB) as well as supervisory law (WpHG or MAR).
Are there any special legal regulations regarding the calculation method of EBITDA?
There are no legally binding requirements in Germany regarding the specific calculation of EBITDA. Its composition is not uniformly defined by law, so the calculation method is determined either by accounting standards (e.g., IFRS, US-GAAP) or by company-specific rules. From a legal perspective, it is important that the calculation method is explained in the notes or management report and made comprehensible to third parties (§ 284 (2) No. 1 HGB, IAS 1.117). In addition, EBITDA must be determined consistently over the years to ensure comparability. Changes to the calculation method must be disclosed and justified. For listed companies, the ESMA Transparency Guidelines on the presentation of alternative financial metrics also apply, according to which comparability, consistency, and clarity are of central importance.
Can incorrect disclosures of EBITDA have legal consequences?
Yes, incorrect, misleading, or improper disclosure of EBITDA, especially in annual reports of listed companies, can have significant legal consequences. Pursuant to § 331 HGB and §§ 37b, 37c WpHG (accounting and ad hoc publication obligations), there are civil liability risks. Incorrect EBITDA disclosures may also constitute accounting fraud (§ 331 HGB, § 400 AktG) or capital investment fraud (§ 264a StGB). For management boards and managing directors, both civil and criminal liability risks may arise if key information regarding EBITDA is provided incorrectly or incompletely.
What disclosure requirements does securities trading law impose on publishing EBITDA?
Under the Securities Trading Act (WpHG) and the Market Abuse Regulation (MAR), listed companies are subject to special requirements regarding financial reporting and the publication of material information. If EBITDA is used as an “alternative performance measure” in financial reports, ad hoc disclosures, or investor relations communications, the information provided must be precise, transparent, and consistent. Moreover, a reconciliation to statutory financial metrics must be published (cf. ESMA/2015/1415). Incorrect or misleading EBITDA presentations may be considered market manipulation or insider trading and may result in regulatory as well as criminal consequences. Fines from BaFin and civil claims by investors may also be imposed.
Is EBITDA relevant under tax law?
Under German tax law, EBITDA as such is not a normatively relevant amount and is not used when calculating taxable profit. However, EBITDA is frequently used as a basis for tax planning and audit procedures, for example to validate company valuations under IDW S1 or for benchmarking. In company transactions, EBITDA calculation may be subject to specific tax review, since tax profit adjustments (e.g., non-deductible business expenses, tax-exempt income) are not automatically accounted for in EBITDA. Faulty or undisclosed EBITDA adjustments may therefore trigger tax corrections and subsequent payments in case of disputes.
How is the protection of the term EBITDA regulated under competition law?
The term “EBITDA” is a generally used business term and does not enjoy special trademark or competition law protection. Companies are generally permitted to use this term unless such use is misleading or constitutes unfair competition within the meaning of the Act Against Unfair Competition (UWG) (§ 5 UWG: misleading about business circumstances). Advertising statements or comparisons based on EBITDA must be factually correct and not misleading, otherwise competitors may assert claims for injunctive relief and damages (§§ 8, 9 UWG).
Are there reporting and disclosure obligations regarding EBITDA in the context of company sales?
In the context of company transactions (M&A), the disclosure and documentation of EBITDA is often a central part of transaction documents (e.g., fact books, financial due diligence). Legally, however, there are no specific statutory provisions requiring the disclosure of EBITDA in the sales process. Instead, the general principles of pre-contractual disclosure and information obligations (culpa in contrahendo) apply. If potential investors or buyers are provided with incorrect or incomplete EBITDA information, this may give rise to claims for damages based on pre-contractual fault (§§ 280, 311 (2) BGB). In individual cases, warranty and indemnity obligations in the share purchase agreement may also be linked to EBITDA calculation, whose legal enforceability depends on careful documentation and contractual arrangement.
