When selling your veterinary practice, you should understand that the price you get will be based on a valuation of your EBITDA (earnings before interest, taxes, depreciation, and amortization). EBITDA is a measurement of a business’ free cash flow and a good way to understand how much cash a business generates from operating activities alone since it excludes things like debt and other non-operating expenses.
To truly leverage your value, your valuation should be based on Adjusted EBITDA. This is when EBITDA moves up or down based on one-off or add back expenses.
What can we use to adjust EBITDA? The short answer is a lot of things, and it changes from practice to practice. Here is an example:
- Let’s say you pay your accounting firm $4,000 a month for services. All of the buyers interested in purchasing your practice will have internal accounting departments and will not need to pay that expense. Therefore, you can “add back” that cost to your adjusted EBITDA and increase your practice’s value.
Other examples can include, but aren’t limited to, salaries for your spouse, family and friends that will no longer work for your practice post-transaction, the cost of using outsourced services such as accounting, marketing, etc., vehicle expenses, travel and entertainment expenditures, and other costs that you run through your practice. Chances are when you no longer own your practice there are several expenses that will no longer exist on your income statement, all of which should be considered add backs to your EBITDA.
In addition to add backs, you should also take a look at “one offs” or “one-time expenses.” Often, valuations are based on a trailing twelve month or last calendar year income statement. If you had expenses during that time that were out of the ordinary, or “one offs,” they should be added back to increase your EBITDA. Examples include:
- Replacing an HVAC system
- Major repairs to your clinic
- Upgrading your computers, lab equipment and/or software
- Paying a one-time bonus to an employee
- Paying a 3-year contract up front
One offs are frequently overlooked but they can add up! It may not seem like much, but if you sell for a 14x multiple of EBITDA, a $20K one off expense is worth $280,000! This is one of the reasons why it is important to have someone who understands the process by your side. If you’d like to set up a call to talk about your veterinary practice, book a consultation today.