All About EBITDA

Well, not really ALL about EBITDA; that said, it’s essential 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 acronym EBITDA has been around forever and doesn’t just apply to the dental world. EBITDA is an acronym used by the valuation profession to measure profitability or adjusted cash flow for a business. They use this measurement to help them develop the values of companies and other business financial analysis projects they might be involved with.

The exciting 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 practices’ EBITDA. It’s not, in my opinion. So many assumptions can go into someone’s calculation of EBITDA, and based on who is calculating it and for what purpose, I don’t think there’s any value in comparing your practice’s EBITDA with someone else’s practice EBITDA. Instead, know your EBITDA 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 let you get a grasp of what a reasonable practice price range may be when it comes time to sell your course.

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 analyzing to make various assumptions about various aspects of a business, such as 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 practice owner owns the real estate.
– Determining reasonable compensation for family members working in practice and assessing their duties and tasks.
– Eliminating any unnecessary or discretionary expenses like owner’s perks such as vehicle expenses, business emails, travel expenses, high CE costs, etc.
– Adding expenses any other owner may be required to have that the current owner doesn’t have. Maybe advertising, IT costs, specific insurance, etc.
– Assessing the collections and eliminating income that isn’t “practice” related, like income for product promotion, lectures, consulting, or vendor rebates.
– Some might eliminate or add income based on the patient base and payer mix of the patient base.

As you can see, there isn’t a one-size-fits-all formula into which you can plug your practice financials and magically arrive at a figure comparable to every other dental practice; EBITDA doesn’t work like that.

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 tiny 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.