The use of acronyms is commonplace in most walks of life, and many have just become accepted as part of the language, even the oracle itself, the Oxford English Dictionary, is known in its shorter form of OED! To the uninitiated, these abbreviations can seem overly complicated, daunting even, as the fuller and more easily understandable term is truncated into what appears to be a new language. Ask a non-dental professional what UDA stands for, and you’ll likely get a blank look; likewise, the term EBITDA might elicit a similar reaction from anyone outside the finance community. Nevertheless, its importance in understanding the health and value of any business should not be underestimated.
The full title is earnings before interest, tax, depreciation and amortisation. Earnings are simply revenue less costs. Interest is the cost a business pays for any financing in place, for example, on loan agreements. Tax is what the business pays to the government or other state bodies. Depreciation and amortisation are similarly treated as they reflect the decrease in the value of an asset over time. Depreciation typically refers to tangible assets (cars and machinery, for example) and amortisation to an intangible asset (like goodwill). In a very simple example, you purchase a computer for use in the practice for £2,000, and you expect it to last four years. The asset (the computer) gives you economic benefit for four years, so you depreciate it over that period, thus the cost to the business’ profit and loss account (P&L to use another acronym) is £500 each year (£2000 divided by four).
Of course, the I, T, D, A in our EBITDA (namely interest, tax, depreciation and amortisation) may vary from business to business and even from practice to practice, as they depend on the individual arrangements in place for financing, tax and the purchase and useful life of their assets. Therefore, looking at earnings before deducting these amounts gives a better indication of the health of the business and enables comparisons with other businesses or practices to be done more easily on a like-for-like basis. Of course, this is critical when it comes to valuing a business.
Andy Acton of Frank Taylor & Associates continues, “We are very focused on EBITDA when it comes to valuing practices, but as always, the devil is in the details. We often find there are other costs that are unique or personal to the principal, for example, training, travel and entertainment or the cost of the full-time principal themselves, that are still included in the EBITDA figure. These, too, will vary from practice to practice. Therefore, we find it beneficial to add these costs back to get a ‘reconstituted net profit’ and therefore a more accurate basis for any like-for-like valuations we do. For those not familiar with this, I can fully appreciate that it can seem daunting, but we are very experienced in helping people through the process, understanding their business’s costs and revenues in order that we can get the best, most accurate and most transparent valuation for them.
If you want help in getting a professional valuation of your practice, give us a call on 0330 088 1156 for further advice.
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