As a veterinarian, “EBITDA” is not a term you come across in your day-to-day work. Maybe you’ve never heard of it until now. But if you’re thinking about selling your practice, it’s a term you need to know.
In simple terms, EBITDA is a measure of profitability that is used in the mergers and acquisition world to help determine your practice’s valuation. Let’s break down what EBITDA means, why it’s important in the veterinary sales process, and why corporate buyers care so much about it.
What is EBITDA?
EBITDA (ee-bit-dah) is an acronym in accounting that stands for:
EBITDA = Earnings before Interest, Taxes, Depreciation and Amortization.
EBITDA ultimately approximates the cash generated by your business from its day-to-day operations, ignoring the capital structure (or debt) and large equipment purchases. It does not include one-time costs. Let’s clarify why we do not include interest, taxes, depreciation, and amortization as part of this metric:
Interest
Interest is a cost of financing your business, whether it’s interest on loans used to buy your veterinary clinic or interest on equipment. EBITDA looks at the cash or profits generated by your business regardless of how you finance the practice. So, whether you have $1 million of debt from purchasing the practice or no debt because you’ve owned the practice for 20 years, it does not impact the EBITDA calculation. A buyer does not consider your debt because they expect you to pay off all debts at closing. Therefore, we add back interest costs.
Taxes
In EBITDA, taxes refer to your income taxes (state and federal), which can vary based on your corporate structure and personal tax situation. A buyer of your veterinary practice will have their own tax situation to consider, so they will ignore yours. However, there are a couple of exceptions to this rule: EBITDA does include real estate taxes if your lease requires the veterinary hospital to pay these costs. It also includes sales taxes you pay on products. These are taxes that do not change based on who owns the business or how it is structured.
Depreciation
Depreciation is a non-cash cost that accountants add to your income statement. It spreads the purchase cost of equipment or building improvements (leasehold improvements) over the useful life of the asset.
For example, imagine you buy some digital radiography equipment for $50,000. Instead of just listing this as an expense on your income statement, you would record it as a Fixed Asset on your Balance Sheet. Then, you’d gradually expense it over its useful life, which for this equipment is seven years. So, each year, you’d have a non-cash depreciation expense of $7,143.
When we calculate EBITDA, we don’t include this depreciation expense because buying equipment like digital radiography is a one-time thing, not a regular expense. And compared to other businesses, veterinary practices don’t make many “big” capital purchases.
Amortization
Amortization is also a non-cash cost that is like depreciation but relates to intangible assets.
When someone buys a veterinary practice, they might include a deal where the seller agrees not to compete for five years. The buyer then assigns part of the purchase price to this covenant not to compete agreement. Even though they pay the cash now, the expense is spread out over the five years because that’s how long the non-compete is valid. So, from an accounting standpoint the cost is recorded gradually over that period as a non-cash expense. From a business valuation standpoint, this type of expense is ignored or added back to EBITDA.
Why is EBITDA So Important to My Veterinary Practice Sale?
EBITDA is a way to estimate the cash your business generates from its daily operations. For veterinarians, it’s especially handy as a cash flow measure since there usually aren’t many accounts receivable.
When selling a veterinary practice, buyers typically apply a purchase price multiple to your EBITDA to determine its value. In 2011, the average purchase price multiples were 4-6x EBITDA for an individual practice. From 2016 to 2019, these multiples rose to 7-12x EBITDA. In 2021 and early 2022, multiples expanded to 12-18x EBITDA, depending on factors like geography, growth rate, size, and whether the practice was a specialty or general practice. Since early 2022, multiples have come down but remain slightly above pre-COVID levels, averaging 8-14x EBITDA in late 2024. Check out our guide on practice valuation to learn more about what factors are considered when determining your practice’s worth and EBITDA multiple.
By using a multiple of EBITDA, buyers can see how many years of current cash flow they will pay for your business. If you generate $500,000 of EBITDA today and a buyer pays 13x (or $6.5 million), they are paying for 13 years of current cash flow. Note that in future years, they would expect to grow that $500,000 in EBITDA to $700,000 or more. The faster your revenues and EBITDA have historically grown, the higher the purchase price multiple a buyer will pay for your practice.
What is Normalized EBITDA?
Normalized EBITDA adjusts the revenues and costs you’ve incurred over a twelve-month period to reflect what the business would likely have incurred if it were run by a corporate group (while keeping your vendor contracts in place). Think of it this way: what expenses would a corporate group not incur that you did? Some typical items we look at as ‘add-backs,’ or expenses we eliminate, include:
- Auto expenses and auto insurance
- Repair and maintenance or capital improvements: large equipment expenses (like DR or new surgery lights) or building costs (like new floors or new cabinets) are typically add-backs since buyers view them as capital improvements that do not go on the income statement. General repair and maintenance costs, like an HVAC maintenance agreement, are not add-backs.
- Travel and meals not directly related to the business
- Salaries for family members who help the business but will not remain employed by a corporate group
- Adjustments to market rent rates for the building (if you are over- or under-charging rent relative to the market, we adjust to market rates)
We also make ‘market’ adjustments in some expense categories. For example, we include what a typical corporate group pays for health insurance, continuing education allowances, staff meals, and other standard expenses. Buyers will make their own adjustments for these and other items based on their specific approach.
Using Experts for Your Normalized EBITDA Analysis Matters
Normalized EBITDA is the key figure we use to market your practice to potential buyers. Why? Because it shows corporate groups what they likely would have achieved over the past year if they had bought your practice. When you partner with Ackerman Group, we work closely with you and your accountant to identify all the relevant ‘add-backs’ that boost your EBITDA and any expenses that probably won’t continue.
Having someone experienced in calculating Normalized EBITDA put this analysis together for you is crucial for securing the best deal for your business. Sellers who skip using an advisor might let buyers do the calculation and form a proposal themselves. While this might seem okay, we can assure you that most buyers miss add-backs without an advisor’s help. Your normalized EBITDA is critical for getting the best price for your practice, and having a trusted source perform the analysis will lead to a higher valuation.
Ackerman Group offers valuations of veterinary practices that include a quick analysis and estimate of your normalized EBITDA. After you sign an Engagement Letter with Ackerman Group, we will immediately start working to finalize your “Normalized EBITDA” for the trailing twelve-month period (which may be different from the EBITDA on your income statement and slightly different from the valuation results). This normalized EBITDA analysis will provide the basis for negotiating the valuation of your practice.
To get started with your complimentary and confidential veterinary practice valuation, click here.