EBITDA – more dark than light

Alun Rees explains why EBITDA isn’t a good measure to value a practice.

Since I watched a consultant oral surgeon baffle a patient about their TMJ and how they needed an OPG, I have been very wary of acronyms especially TLAs (three letter acronyms).

I try to avoid or limit them in my conversation.

EBITDA stands for earnings before interest, tax, depreciation and amortisation and is twice a TLA.

Its popularity started during the Dotcom boom of the 90s with the growth, and later demise, of loss making technology businesses with sky-high valuations.

Its use has crept into dentistry since Emmet O’Neill introduced the philosophy and language of airplane financing with his Smiles chain.

EBITDA was attractive to venture capitalists because it could be used to compare different businesses with one another, unlikely in dentistry unless you are buying a group of practices.

Its use provides an opportunity for obfuscation.

Dentists may understand what the words are but rarely why they are used.

Read more from Alun Rees:

A skewed price

Acronyms can be used to attempt to prove that you’re cleverer than the person to whom you’re talking.

I am yet to have a client explain to me why the EBITDA figure is so important to them, in fact quite the opposite.

When I am advising clients on good, and not so good, purchases, they are often overwhelmed with figures and EBITDA seldom helps.

Of course brokers want to get the best price that they can for their clients and some (but not all) use EBITDA because it can present a business at the highest possible price.

Whilst it might be relevant for profitability, it’s no good for cash flow purposes – the most important measure.

It also doesn’t take into account the need for working capital and replacing equipment.

It’s rare to see a practice for sale where there isn’t a need for further investment within a year or so.

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