Many factors can affect the value of your practice, but one you should not overlook is your EBITDA multiple. This number can attract buyers and influence how others see your business, making it critical to keep in mind as you plan your exit strategy. This blog will take a closer look at EBITDA multiples and the impacts they can have on private practice owners.
What Is EBITDA?
You may have heard the acronym “EBITDA” but are unfamiliar what it stands for. EBITDA stands for “earnings before interest, taxes, depreciation, and amortization.” This financial metric provides insight into a business's profitability prior to certain financial costs and accounting processes.
Unlike net income, EBITDA focuses solely on operational performance. By removing these additional factors, your potential buyers can gain a better understanding of how your practice is performing in its fundamental operations. For private practice owners, EBITDA is particularly useful when comparing their practice to competitors or assessing whether specific operational changes can lead to profitability improvements.
What Are EBITDA Multiples?
Now that you are familiar with EBITDA, we can look at EBITDA multiples. To compute your EBITDA multiple, you need to determine your enterprise value and divide it by your EBITDA. You can calculate the enterprise value of your business by adding your market capitalization, the value of your debt, minority interest, and preferred shares and subtracting your total cash and cash equivalents.
This calculated multiple can unlock insight into your practice’s market value. For private practice owners, especially those nearing retirement or considering a sale, this metric helps build the foundation for transaction negotiations.
This financial framework provides a language through which owners can communicate the value of their business, whether to an investor, buyer, or advisor. Although high EBITDA multiples can be attractive for buyers, they may also gravitate toward practices with lower multiples.
For example, some may believe your practice is overvalued if its EBITDA multiple is particularly high. However, if your private practice has a low multiple, it may signal to some buyers that they have an opportunity for a bargain by acquiring an undervalued practice.
Last year, many industries saw both upward and downward trends in their median multiples, including trends of 4.8x in the second quarter, before falling to 3.2x in the third. However, the fourth quarter saw them increase to 3.5x.
What Aspects Affect My Multiple?
Now that you know the impact of EBITDA multiples on private practice owners, you may wonder what factors affect these numbers. Read on to learn about several of these variables and which ones you can control to achieve an optimal valuation.
Location
Your practice’s geographic location can affect your EBITDA multiple. Practices located in larger metropolitan areas often receive higher multiples because of increased demand and the ability to attract more customers. On the other hand, rural practices may face limitations due to fewer consumers, limited workforce availability, and lower overall revenue potential.
This geographic reality may either help or hinder your valuation. However, factors like unique services or regional competitive advantages can boost multiples regardless of location. For example, if a rural practice has a monopoly on specialized services, it may override the standard assumptions of geography and help boost your multiple.
Practice Size
Larger-sized practices tend to earn higher multiples than smaller ones for several reasons. First, they often have more operational resilience, which signals lower risk for potential buyers.
Second, larger entities frequently have multiple revenue streams, such as offering specialized services. These offerings allow these businesses to earn diversified client bases. Stability and diversification make them more attractive and more valuable to potential buyers.
If you have a modestly sized practice, you can improve your EBITDA multiple by focusing on patient/client and staff retention. Having proven retention will boost how buyers perceive you and therefore may increase your valuation.
Competition
Competition within your specific market will also impact your EBITDA multiple. If your practice operates in a highly competitive area, with multiple businesses offering similar services at similar price points, your multiple may be lower. Intense competition generally leads to tighter margins and higher investment risks for potential buyers.
On the other hand, practices that hold a unique competitive edge may see their multiples increase considerably. For example, if your physical therapy practice uses advanced or innovative treatment technologies not widely available in the area, this differentiation can enhance your valuation. Similarly, an accounting practice specializing in a niche industry may command higher multiples due to its targeted expertise.
Growth Rates
Historical growth rates and future growth potential are among the top factors affecting EBITDA multiples. Buyers generally pay more for thriving businesses because growth often equates to higher future earnings. A practice that has consistently added new patients, clients, or service offerings year over year is likely to command a premium.
Conversely, lackluster growth or stagnation can deter buyers, reducing your EBITDA multiple in the process. Investing in growth initiatives, whether expanding your service range or adopting technology to streamline operations, can make a meaningful difference in your practice’s value.
Rates of Mergers and Acquisitions
Finally, the broader landscape of mergers and acquisitions in your industry influences your EBITDA multiples. During times of high M&A activity, multiples often rise as competition among buyers heats up.
However, when M&A activity slows due to economic downturns or regulatory changes, multiples tend to stabilize or even drop. Staying informed about these broader market trends enables private practice owners to time their transitions more effectively, maximizing their value.
Now you can understand why you shouldn’t overlook the effects of EBITDA multiples on your practice. These can have an impact on your business’s valuation and help shape your financial strategies, especially when planning to sell or merge. By understanding EBITDA and what influences multiples, you can make decisions that will better position your practice for long-term success.
You can also better prepare with the help of Private Practice Transitions. Our skilled, experienced brokers will guide you through the financial intricacies of selling your practice. Reach out to us today so that we can help you take your next steps with confidence.
