ALL ABOUT EBITDA
Well, not really ALL about EBITDA, that said, its important to know what it is, what it means, how it’s used, how it’s calculated and most importantly, does it apply to you and your practice.
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. Some see it as a form of net cash flow for a business. The fact is, the acronym EBITDA has been around forever, and it doesn’t just apply to the dental world. EBITDA is an acronym used by the valuation profession to define a measurement of profitability or adjusted cash flow for a business. They use this measurement to help them develop values of businesses and other business financial analysis projects that they might be involved with.
The interesting thing is, as it relates to the dental practice transition world, EBITDA has always been used by those of us who handle a lot of dental practice transition engagements, however, not until DSOs became more prevalent did the term EBITDA become more widely marketed and touted as the measuring stick for dental practice valuation work. It always has been.
Now that many dental practice owners have heard the term, they wonder what their EBITDA is and how to calculate it. Some even believe it’s valuable to compare their EBITDA with other dental practice’s EBITDA. It’s not in my opinion. There are so many assumptions that can go into someone’s calculation of EBITDA and based on who is calculating it and for what purpose, I just don’t think there’s any value in comparing your practice’s EBITDA with someone else’s practice EBITDA. Instead, know what your EBITDA is and be prepared to improve it as necessary.
Knowing and tracking your EBITDA from year-to-year is a helpful practice performance measurement that may allow you to look for areas of improvement in your practice and will allow you to get a grasp of what a reasonable practice price range may be when it comes time to sell your practice.
In terms of how it’s calculated, as I mentioned above, many times this depends on who is doing that calculation and for what purpose. I say this because calculating EBITDA requires the one doing the calculation to make various assumptions about various aspects of a business, in this case a dental practice, income and expenses. These are some examples of some of the issues that the person doing the calculation might have to consider and make appropriate adjustments for:
- Determining a reasonable compensation for a doctor to produce the dentistry
- Determining a reasonable rent expense if the owner of the practice also owns the real estate
- Determining a reasonable compensation for family members working in the practice and assessing their duties and tasks
- Eliminating any unnecessary or discretionary expenses like owner’s perks such as vehicle expense, business emails, travel expense, excessive CE costs and so on
- Adding expenses any other owner may be required to have that the current owner doesn’t have. Maybe advertising, IT costs, certain insurances, etc
- Assessing the collections and eliminating income that isn’t “practice” related like income for product promotion, lectures, consulting or rebates from vendors
- Some might eliminate or add income based on the patient base, payer mix of the patient base
As you can see, there isn’t a one-size-fits-all formula that you can plug your practice financials into and magically arrive at a figure that is comparable to every other dental practice, EBITDA doesn’t work like that.
If and when you’re ready to see how EBITDA applies to you and your practice, I suggest you reach out to your CPA, assuming they are experienced in this very small niche of the valuation profession or another experienced advisor that is educated on calculating EBIDTA and have an initial conversation with them on the nuances of your practice to see how they can help you.