Of the thousands of conversations I have each year with buyers and sellers of healthcare-related businesses, very few recognize the financial acronym EBITDA. This is understandable because many health-care business owners began their companies out of interest in a particular field or passion, and less on the ultimate pricing of their business for an exit strategy.
EBITDA refers to earnings before interest, taxes, depreciation, and amortization, and it is one tool in estimating the value of a company for the purpose of pricing it prior to an anticipated sale. The acronym is also used by others, including financiers, as they estimate the value of a company to whom they are lending funds. Market pricing is often initially based on a multiple (e.g. X x EBITDA) that includes current market conditions, other recent transactions, and special characteristics of the business. EBITDA is widely used, with a careful eye on sales and cash flow. A fiscally unhealthy company can be positioned to look almost healthy, despite poor sales and cash flow, which is why due diligence is an essential aspect of any transaction.
If you’re considering a sale in the near or more distant future, it is worth calculating the EBITDA of your company, especially if you have unique business expenses (i.e. added compensation, benefits, travel, etc.). The exercise will help you to understand the basis of pricing from the buyer/market perspective, and possibly assist you in enhancing the value of your company prior to putting it on the market.