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Does Selling My Physical Therapy Practice Make Economic Sense?
How Much EBITDA Do I Need?
Here is a simple example of a small private practice with a single owner to further explain what is left over after expenses (simple definition of EBITDA). If your practice’s total earnings are paid out in the owner’s salary, the buyer will normalize the fair market compensation of what it costs to replace you. So, if you pay yourself $200,000 (what is left-over after all expenses) and the market price to replace you is $150,000, an estimate of the EBITDA is around $50,000. An EBITDA at a multiple of 3.0 would give your practice a value of $150,000. The seller receives $150,000 less any debt the practice has. If the practice had $50,000 in debt, the seller would get $100,000. And then of course, the sale would be subject to federal and state taxes as well.
On the other side of the equation, there is a point where the deal does or does not make economic sense for both parties. Buyers form a decision based on conducting due diligence on the seller’s company. All buyers have slightly different requirements for their due diligence process, but most will ask for a mixture of clinical and operational statistics as well as financial information, typically going back 3 years. Buyers often ask for 3 year-trailing data to look at trends and to come up with a fair value for your practice. For example, one year may have resulted in a much lower EBITDA, such as 2020 with the COVID pandemic. Or it could simply be due to a large investment in new staff and the buyer will want to see that, but not only use one year to put a value on the practice, as to be fair to the seller.
Finalizing any deal also requires the use of accountants who assess earnings and lawyers to review and draft transaction documents, all of which finalize the sale. Utilizing these professionals involves additional expenses to the sale for both parties. So, an EBITDA of $50,000 that we used could be too small. But all decisions are buyer specific and these are just some of the pieces of a deal that can determine whether making a deal makes sense for both buyer and seller.
As you plan for retirement whether it is now or in the future, you want to consider the value of your business. Often the perceived value of your practice may not fall in line with current market conditions or your financial performance. But your company’s EBITDA is a great indication of the value of your practice.
For more information about selling your practice and the due diligence process, please contact us today!
Corporate Development Associate