Practice valuation is a key question when you’re thinking about how to transition from ownership to “something different,” whether that’s a traditional, legacy sale, or a move to private equity. Even if you’re not thinking about selling at all right now, experts say you should seriously evaluate the cash value of your practice.
The way practices are evaluated has changed somewhat over the past few years. Traditional methods included revenue-based, cash-flow analysis, and several others. Currently, consultants and brokers favor the “Multiple of EBITDA” method discussed in this video.
Dr. Kling breaks down the basics of EBITDA for our audience as Earnings Before Interest Taxes Depreciation and Amortization. He walks through the basic steps of calculating EBITDA for your practice, detailing what’s included, what’s adjusted, and how to understand “Owner Add-Backs,” so business owners can get a solid understanding of their business EBITDA.
The purchase price of a practice value is understood as a multiple of their EBITDA, and that multiple currently running between 5 and 7. This means the EBITDA number (in dollars) is multiplied by a number, based on several variables. These can include location, the practice condition, current trends, staff, and other factors.
There are some important changes in play due to COVID as well. Private equity firms are coming up with solutions to allow fair practice valuation in a climate where the past twelve months are probably not typical of their practice production. There are also considerations around PPP loans, and the practice’s potential for full recovery from lockdown restrictions.
Business owners need to know what their practice is worth so they can make an informed decision about whether selling will help them meet their financial and professional goals. A clear understanding of your current EBITDA may also give you the chance to maximize your practice value before you’re ready to make that important transition to the next phase of your career in the future.