Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) is currently used as part of the dental practice valuation process. As I mentioned earlier, 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 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. 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.
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 6-7 x for single businesses and usually a higher multiple for larger dental groups
More on the Value of a Dental Practice
For more information on determining the value of a dental practice, have a look at the dental practice valuations section of the website or contact us today!
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