More and more, when it comes to valuations of businesses, and in particular dental practices, you're going to be hearing the term EBITDA.
This is an accounting term that stands for earnings before interest, taxes, depreciation and amortization. (Kind of nice that they compressed it into something shorter, isn't it?) Essentially it is a standardized way of looking at the profitability of a company or business.
EBITDA is a term more used with public companies, but now it is becoming a way of evaluating the potential purchase price of any business, as well as its market value. This is becoming relevant to the dental industry, in part because of group practices.
For many years, dental practices were valued based on a multiple of their gross collections. For example, if a dental practice collected an average $950,000 for two years in a row, generally the valuation would be based on some percentage of that number, between 80% and 120%, and that would be the purchase price.
This of course is a simplification. There are many other factors that go into the purchase price of a dental practice, from accounts receivable to age of the facility, equipment leases, property held, and more.
The primary reason this term EBITDA is becoming more relevant in dentistry is because, as more group practices are being bought and sold, or private equity firms are investing in them, EBITDA is a much more common measurement of the value of a business in the investment community, i.e., venture capital, private equity funds and public companies.
When a business is valued by its EBITDA, it is generally calculated as multiple of that number. Typically, that number might be between 10 and 12 times EBITDA, but again, other factor come into play. It will always be based on the potential for growth for the business, as well as what might impact its profitability.
This is now becoming a more commonly used metric to evaluate the purchase price for multi-office acquisitions. And we are starting to see it also being an evaluation even of single practices. EBITDA is one more term you should be aware of, because someday you will undoubtedly be selling your dental practice.
In any case, you should always get assistance when transitioning your practice. This is not something you do often enough to have the expertise to do it properly. A practice coach is much more familiar with the twists and turns of these transactions. And, of course, Fortune Management has a division specifically for practice transitions.