EBIDTA Explained: An Overview for Dental Practice Buyers
When you’re looking to buy a dental practice, you must understand the true profitability of the business. This is often an area of confusion or misunderstanding, as many buyers focus solely on the net profit in the accounts.
However, this doesn’t paint a complete picture of the financial health of the practice due to potential inconsistencies in the accounts, such as paying a spouse or personal expenses which won’t be relevant for the new owner. When it comes to funding, the numbers are, of course, key to the success of any application for lending.
So what should you be looking for? And what are the lender's considerations when assessing the profitability of the business? In this blog post, we’ll discuss EBIDTA and why it’s a more reliable measure of profitability for dental practice buyers.
What is EBIDTA?
EBIDTA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. This metric subtracts expenses that aren’t directly tied to the day-to-day operations of the business, and also takes into account depreciation and amortisation, which are non-cash expenses that can skew net profit numbers.
It’s therefore a measure of a company's profitability of the operating business only, i.e. before any effects of indebtedness, state-mandated payments, and costs required to maintain its asset base.
As a buyer, EBIDTA can give you a much more accurate indication of the potential earnings, profitability, and value of a dental practice. This also allows for a more accurate comparison between businesses and industries because it eliminates factors that may not be consistent across all companies.
EBIDTA is also a key consideration for lenders when assessing funding for a dental practice acquisition.
What is a Good EBIDTA?
The definition of a good EBIDTA can vary based on the specific goals and plans for the future of the business.
For funding purposes, a good EBIDTA would show sufficient profitability to comfortably repay the bank loan whilst providing the incoming Principal with a wage which allows them to sustain their current lifestyle and cover outgoings.
Calculating EBIDTA Accurately
Agent listings generally provide accounts detailing the turnover and net profit of a practice and usually show their own estimate of the current EBIDTA based on the most recent financial accounts and remodelling to suit an owner-occupier (usually one full-time principal) or corporate model (fully associate-led).
However, as a buyer, it’s advisable to do your own due diligence to ensure you are clear on the true EBIDTA for yourself and potential lenders. This can be done with the help of a dental specialist accountant or finance broker, who can review and project EBIDTA based on your personal plans for the business, rather than relying on the agent’s estimations and cost assumptions.
While lenders will need to know about your plans for the future of the business, they will base their calculations and assessment on the current trading position rather than forecasts.
In summary, EBIDTA is a crucial metric which provides a more comprehensive and reliable indicator of the profitability and potential value of a dental practice. As a buyer, it’s important to understand EBIDTA and calculate it accurately, as this will have a significant impact on your funding application success.
Remember too, that each dental practice is unique and will have its own expenses and profit drivers therefore it’s advisable to seek professional advice when making your assessment and determining the value of a potential acquisition.
When assessing EBIDTA and other financial metrics, working with a team that understands the complexities of dental practice acquisitions can be a determining factor in the success of your funding application and overall acquisition journey.
At Henry Schein Financial Services, we have a dedicated acquisitions team who are on hand to provide expert guidance and support during the buying process – get in touch with us today to find out more.