How to Calculate Your EBITDA
As buyer interest explodes in multi-doctor and multi-location medical and dental practices, a drop in demand isn’t happening anytime soon. For this reason, countless physicians and dentists have this question hanging over their heads: “Who can teach me how to sell my practice?”
Are you interested in merging with a private equity-backed medical support organization (MSO) or a dental service organization (DSO)? In that case, you’ll have to learn how to calculate your EBITDA.
These groups will use your EBITDA as a basis for applying their decisions on how to structure the acquisition and gauge return on their potential investment.
What You Should Know About EBITDA
Evaluating a company by EBITDA gained its popularity in the business world at the height of the leveraged buyouts era in the 1980s. During this time, most distressed organizations were financially restructured by investors. The majority of these investors used EBITDA as a yardstick to determine if the organization could afford to pay back the interest on a leveraged buyout deal.
Today, private equity firms look at a company’s EBITDA before considering it as a candidate for acquisition. This metric provides them with enough evidence that they will see a return on their investment.
Since your EBITDA is a reliable indicator of your practice’s financial soundness and operational efficiency, it gives your prospective buyers and investors a clear picture of the value of your practice.
What Is EBITDA?
EBITDA stands for “earnings before interest, taxes, depreciation, and amortization.” It’s an analysis formula that gauges the financial health of your practice and or determines its valuation. When calculating your EBITDA, you’re measuring your net income, with costs related to interest expense, taxes, depreciation, and amortization added back in.
“Interest” comprise expenses caused by interest rates such as interest on loans by third-party lenders or banks. “Taxes” include federal income taxes, as well as state or local taxes imposed by regulatory and government authorities.
Furthermore, “depreciation” refers to a noncash expense that shows the reduction in the value of fixed company assets. “Amortization” is another noncash expense that indicates the cost of significant intangible assets. While depreciation signifies asset value reduction, amortization refers to a process that slowly writes off the initial cost of a specific asset.
How Do I Calculate My Practice’s EBITDA?
To get started, you’ll have to use your income statement and cash flow statement as your references for the period you’d wish to review. You can use two formulas to calculate your practice’s EBITDA value:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
This method requires you to start at the bottom line of your net income or income statement. You can calculate your net income by subtracting your expenses from your total revenue, including the cost of goods sold, interest, and tax payments.
Next, you should add back in the interest and tax line items. Moreover, you should also add in your depreciation and amortization expense based on your cash flow statement.
EBITDA = Operating Profit + Depreciation + Amortization
If you decide to use this formula, you should start with operating income or operating profit in the middle of your income statement. Operating profit only indicates your practice’s total revenue less cost of goods and operating expenses. Since it excludes tax and interest expenses, you’ll have to add depreciation and amortization.
To determine whether your practice has a profitable operation or otherwise, you’ll have to calculate your EBITDA margin by using this formula:
EBITDA Margin = EBITDA / Revenue
A higher EBITDA margin shows that your practice earnings are stable. Conversely, a lower EBITDA margin indicates that your practice has profitability and cash flow issues.
Who Can Teach Me How to Sell My Practice?
Viper Equity Partners, America’s leading transition and consultation firm, brings together professionals from the healthcare community and the investment community. Our team of M&A experts helps both parties communicate for mutually beneficial results. Contact us today to learn what we can do for you and your practice!