Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) is currently used as part of the dental practice valuation process.
The current range of prices that a single practice can expect to attract averages at between 6x and 7x EBITDA. However, let’s put EBITDA to one side for now, and look at what factors come to together to create the value of a dental practice.
It’s important to remember that every practice is different. There are several factors that can form part of the value of a practice, including the accounts over the previous three years, the potential for development and expansion and whether a time limited (PDS) NHS contract is in place or an open ended (GDS) NHS contract.
There are too many variables to list them all here, but one of the most important things to remember is that pricing should always be competitive.
The importance of competitive pricing
There is great demand for all types of dental practice in the UK, so it’s certainly possible to sell profitably. However, it’s important that a practice is not over-valued, restricting opportunities for sale. Buyers are often looking for a practice that they can buy with a view to add value and to re-sale at a profit in the future. This means that they do not want to over-spend.
The sale price of a practice should always be based on transparent figures and evidence. The price has to be supported by the value that the practice represents.
It’s easy to adjust an EBITDA upwards, to try and demand a higher selling price, but this tends to simply lead to a bad reputation for the seller. Getting help from a specialist dental sales agent, such as Samera, is always a good idea. I know I have ensured that several clients have embraced competitive pricing over the years, making completing a sale a lot simpler and quicker for them.
EBITDA Multiple Explained
I have mentioned how important EBITDA is to the value of the business, so I thought it might be a good idea to explain why this is. There is more detailed information available to read, but I am going to cover the basics here.
The Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) represents the true operating profit of a practice. The figure is calculated by adding interest, taxes, depreciation and amortisation back on to net income.
From the profit and loss account you take the net profit figure before tax and interest costs, add back depreciation and any debt repayment that feature in the accounts.
Can you add anything else?
Yes you can. Where current costs are higher than they will be in the future you can add that saving to EBITDA. e.g In many cases repairs and renewals may have been high one year. If they can be expected to reduce then the difference can be added back.
What might you have to subtract?
Any additional costs you may incur, such as rent, if the current owner owns the freehold and is not prepared to sell the freehold. Or, perhaps the costs of the principal staying on for a short while to complete a handover of clients.
It’s worth noting that EBITDA does vary between practices, depending on what costs are involved in running a business, and how it’s run. A realistic EBITDA figure should reflect the value of a practice.
Be very careful and do not be misled when reviewing sales details where EBITDA has been calculated by adding on items that you will still have to pay. We often see subscriptions, travel, repairs and renewals added back on but they will still be a cost to you going forward. Doing this inflates EBITDA and lenders will see through this and reduce the figure.
Upon calculating a figure of EBITDA, valuers apply a multiple to EBITDA to yield a value for the business.
Every sector multiple varies, which is really dependent on the demand for businesses in such sectors.
For instance, in the tech sector, we see very high multiples applied to EBITDA, whilst in Dentistry we see multiples ranging from 6-7x for single businesses and usually a higher multiple for larger dental groups.
Further Information on Starting a Dental Practice
We’ve been helping the UK’s dentists start their own practices for nearly 20 years and we know exactly what it takes to make your practice a success! For all the advice, support and expertise you’ll ever need, contact us today to find out more about starting a dental practice with Samera.