Understanding what EBITDA is very important when buying a Dental Practice.
EBITDA – is the calculation of the true profit of a business and is calculated as follows
Earnings before interest, tax, depreciation and amortisation.
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.
Be very careful – 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.
More on the EBITDA Multiple
For more information on the EBITDA Multiple, check out the Accountancy section of our website or contact us today!
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