My First Million
The best business ideas come from noticing what's working and doing it better, faster, or for a different audience.
EBITDA is usually bullshit earnings that obscure real business performance
The Reasoning
EBITDA was created by cable industry to convince lenders, but ignores real cash requirements like capex and reinvestment, creating misleading picture of actual cash generation
What Needs to Be True
- Most businesses require ongoing capex and reinvestment
- Depreciation often reflects real economic costs
- Interest and taxes are real cash outflows
- Free cash flow is better measure of business value
Counterargument
EBITDA useful for comparing businesses with different capital structures and depreciation policies
What Would Change This View
Consistent correlation between EBITDA growth and actual cash distributions to owners across multiple businesses and time periods
Implications for Builders
Focus on free cash flow rather than EBITDA when evaluating businesses
Always ask business owners how much cash they actually withdraw
Be skeptical of high EBITDA margins without corresponding cash generation
Use cash-based metrics for all investment decisions
Example Application
“Business shows $2M EBITDA but owner only takes out $400K annually - the real business performance is $400K, not $2M, and that's what you should base valuation on”