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How to Value My Physical Therapy Practice
What is EBITDA
In our last blog we talked about putting a value on your practice and what buyers are looking for, which was “EBITDA”. EBITDA is the acronym for earnings before interest, taxes, depreciation, and amortization. This is a measure used by buyers to evaluate the target company’s value or worth. The calculation subtracts the company’s revenue and expenses, but the expenses value excludes interest, taxes, depreciation, and amortization (ITDA). The reason these items are excluded is to protect the company’s value from accounting decisions it may have made over the course of a year.
What are add-backs or normalizations
EBITDA may also include certain add-backs, which typically increase the EBITDA. Add-backs can be best explained as expenses that are not required to run the company. Examples may be the add-back of the owner’s car expenses to EBITDA, adding back excess owner compensation, or a family cell phone plan, that are not used exclusively for the business. These types of add-backs result in a higher EBITDA. But just as there can be add-backs that favor the seller, there can also be negative adjustments or normalizations to EBITDA. For example, if the seller is not properly insured and obtaining proper insurance results in an expense, that expense could lower EBITDA. Another example could be normalizing up the seller’s income, which could also lower EBITDA. Accounting for positive and negative adjustments to the practice’s earnings gives you an adjusted or normalized EBITDA.
What is a multiple and how is it determined?
Once the buyer determines a normalized EBITDA, the target company value is determined by using a multiplier. The multiple of EBITDA generates the total company value. For example, if the company has EBITDA of $300,000 and the multiplier is 4.0, the enterprise value is $1,200,000. There are many factors that can influence a multiple. The PT industry’s ability to grow and the buyer’s risk are key factors, but there can also be deal specific factors. As a strategic buyer, Access PT may consider things like: How many locations does the seller have and are they in more than one state, or is the EBITDA above or below a certain amount deemed to decrease risk, such as $500,000. Normalized EBITDA is most commonly used as the basis of any valuation.
For more information on the valuation process, please give us a call today!
Corporate Development Associate