EBITDA, multiples, and valuation - oh my!

EBITDA is Earnings before Interest, Taxes, Depreciation, and Amortization.

While it was made up by the bros on Wallstreet and is rebuffed by Warren Buffet, it’s not as bad as Adjusted earnings, which is meaningless (but we’ll save that for another time) and is a fairly decent representation for what a business makes from operations.

It’s also what most valuations are based on if you are interested in selling your practice. Also a must know if you are looking to buy a business.

So, let’s unpack it, talk multiples, and some helpful tips when looking to sell (or buy).

The particulars

EBITDA

EBITDA is a like the love child of cash from operations and operating income.

It also takes into account Depreciation and Amortization, which are non-cash expenses. They are non-cash, because while recorded on the income statement as expense, you don’t actually pay out any cash.

You’ve already paid for an asset, now you are incurring the expenses of the thing getting old and useless, but not paying actual money for it.

The concept of depreciation and amortization honestly doesn’t apply too much to many practices, but it’s good to know! Especially once you open that ASC and own the building.

Interest and taxes we all know, but arguably aren’t part of operations. So we take them out. Hall pass

Multiples

Multiples are just a number you multiply EBITDA by to get a valuation for a business. You may hear things like 3x EBITDA or 5x. If you’re slinging SaaS maybe like 16x.

The “3x” etc. is the multiple.

One of the more important elements of the multiple is that they often follow industry averages. Those averages can change over time and are largely market driven.

For example, a few years ago when Oak Street, One Medical, and the other “VBC” primary cares were flying high, medical practice multiples were soaring as high as 10x.

These days you are probably looking at ranges based on market factors, buyer types, and the profile of the business.

Which brings us to the next section…

Drumroll!

Valuation

This is going to be mind blowing.

Like, shocking…

Valuation is EBITDA times the multiple.

I know. You did NOT see that coming.

So then, we have the super complex equation, how do we influence valuation?

As mentioned, you have a few levers. Big ones include buyer types and business profile. It’s a little harder to game the market, so we’ll leave that out.

Buyer Types: You have a few to pick from. The big ones include health systems, private equity, individuals, and other strategic buyers.

Each of these will typically have a multiple range. For example. A private equity firm working on a rollup may pay 5-7x. A private buyer or other physician buyer may be able to pay in the 3-5x range.

It’s also good to know as a buyer. With so much consolidation and private equity in the mix, you need to know what you are up against and expectations.

Business Profile: This can include a lot of things and is the most controllable. Some of the factors include size of the business, infrastructure, market presence, and yes, EBITDA.

Size, for example can give a buyer more confidence that a company is established and has staying power. To become larger you also need to implement systems to be scalable. These are attractive to buyers and can help improve the multiple.

Infrastructure can as well. With a healthy balance sheet, capital assets, great contracts can all be valuable and again, drive higher contracts.

EBITDA is an indicator of all of these elements and having a higher EBITDA indicates a stronger business. Again, leading to a higher multiple.

Wrapping up

These are simple but powerful concepts. And absolutely critical when exploring anything in the acquisition realm.

On the sell side, focus on the levers you can pull to drive higher valuations. On the buy side, know what to look for and understand why sellers are going to market at certain valuations. It will also help you negotiate and both sides get a good deal.

At the end of the day, valuation can be as much art as science.

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