If you’re a healthcare practice owner, chances are you’ve put years of effort into growing your practice, finding new patients, training and keeping staff. So, when it comes time to calculate the value of your business, you want those efforts to be reflected in your business’s valuation.

But business value is about more than just topline revenue and expenses. 

Enter: EBITDA. 

EBITDA stands for “earnings before interest, taxes, depreciation and amortization”, and many potential investors or acquirers will look at your practice’s EBITDA to get a clearer picture of your business’s worth. When we’re talking valuation multiples, we’re often looking at it in relation to EBITDA.

Unlike revenue and expenses though, EBITDA isn’t a fixed number. There can be some nuance in how it’s calculated, and if you’re not looking for those gray areas, you can be leaving cash on the table when it comes to valuations. 

In this article, we discuss what EBITDA is, how it’s calculated, and how you can leverage it to maximize your business value.

What is EBITDA and How is it Calculated?

EBITDA is a way of measuring a business’s cash flow, profitability, and its ability to add new debt, while also adjusting for factors that are beyond the business’s control. This includes taxes and interest that are set by outside organizations, as well as depreciation and amortization, which are inevitable with capital expenditures.

EBITDA allows investors and financial institutions to value businesses across jurisdictions and compare the results.

To calculate EBITDA, the following formula is used:

Net Income + Interest Expense + Taxes + Depreciation and Amortization

By adding interest expenses, taxes and depreciation and amortization amounts back into your income, you’ll actually see your total go up. This means if investors or buyers are looking to value your company as a multiple of EBITDA, the offer will be higher than if they’d used income or revenue alone.

What EBITDA Isn’t

While EBITDA can be a useful tool to project future financial performance, it isn’t always something you see on a balance sheet and often gets confused for other financial metrics. 

Here’s what EBITDA isn’t and how these metrics are different:

Gross Profit

Gross profit is your revenue less the cost of providing services. It’s a bottom line number which can help you track performance, but unlike EBITDA doesn’t look at operational efficiency or normalize performance over different jurisdictions.

Net Income

Net income takes total revenue and removes all expenses, taxes, and interest paid. In terms of calculating your practice’s available cash, it’s a useful number. But EBITDA doesn’t consider taxes and interest, which gives investors a better picture of your practice’s potential earning power.

Operating Cash Flow

Operating cash flow is an officially defined term under Generally Accepted Accounting Principles and is similar to Net Income in that it considers taxes and interest paid, but also includes depreciation and amortization. This gives a clear picture of cash at hand.

By adding back in those taxes and interest paid as well as depreciation and amortization amounts, EBITDA provides a more normalized number for investors to review.

How to Use EBITDA to Increase Practice Value

While the basic EBITDA equation looks pretty straightforward in terms of how EBITDA is calculated, there is room to tweak it in your favour. 

Here are three different ways you can adjust your EBITDA to calculate your practice’s highest value.

1. Stop Treating Your Business Like a Hobby

As the saying goes: Treat your business like a business and it will pay you like a business. Treat your business like a hobby and it will cost you like a hobby.

Treating your business like a business means getting your financial ducks in a row. This can look like investing in more sophisticated accounting software, or choosing a new accountant or business consultant who can help you quantify things like depreciation and amortization for capital assets. 

Treating your business like a business also means not writing off quasi-personal expenses just to lower your tax liability. This is a rookie mistake many owners make, and it’s important to stop doing this for several reasons:

• First, accurate accounting is essential for sound decision making in your practice, and rules are rules – meaning the CRA may audit you. 
• Second, it’s difficult to have a clear picture of profit when it’s clouded with personal expenses.
• Finally, doing so could harm your valuation if you decide to sell. Cash flow is highly important in a business valuation and running personal expenses through your business moves the needle the wrong way.  

2. Exclude Extraordinary Costs

Investors, buyers, and financial institutions will use EBITDA to get a sense of how your practice will perform in the future. So while you want your numbers to accurately reflect your operations, it’s also important to look at the big picture and take out expenses and items that the practice is unlikely to incur in the immediate future.

Costs like renovations, severance pay, or asset purchases can be removed from your EBITDA since they’re typically one-time non-recurring expenses. You’ll probably want to make a note of them so it doesn’t look like there are discrepancies between your balance sheet and your EBITDA value, but most investors won’t balk at excluding them if it means giving a clearer picture of future earning potential.

3. Make Note of Operational Changes

EBITDA is often calculated using several years of data to give a clear picture of your financial performance. But as discussed above, the true value of EBITDA is in determining where your practice is headed, not where it’s been.

If you’ve made a significant change in your operations in the last year or two, you may want to calculate EBITDA to reflect these changes so investors can better understand potential future cash flow. 

For instance, maybe you’ve recently changed your pricing, reduced your labour costs, or improved overall efficiencies through revised patient care procedures. If this is the case, you’ll want to adjust your EBITDA so it more accurately predicts what your practice will look like into the future. 

Confidently Calculate Your Practice’s EBITDA

As discussed, EBITDA can be a bit of a nebulous concept. There’s room for adjustments for things like one-time costs and recent changes to your operations. But if you get too aggressive in boosting your EBITDA number, it can start to look like you’re trying to inflate your business value beyond what it’s really worth.

Investors or acquirers are going to look at your healthcare practice from every angle. They’ll scour your books and ask questions so they truly understand your business’ potential cash flow and earnings. 

That’s why it’s important to keep detailed records and review your financial situation in detail. Ideally, you’ll want to go into any negotiation knowing your financial records are bulletproof and your EBITDA is fully defensible. The last thing you want is unpleasant surprises when questions get asked.

Need help calculating your EBITDA, so you don’t leave money on the table? Book a free consultation with our experts at ELEVATE Practice Intelligence today.