Thoughts About Perceived EBITDA Adjustments
Earnings Before Interest Taxes, Depreciation, and Amortization (EBITDA) is a common term used in healthcare transactions. Why? Because it is a rough estimate of operating cash flow that can help sellers and buyers to price or value a business in an existing market.
EBITDA is normalized or adjusted because owners of healthcare businesses, especially those that are closely held, may utilize various approaches to reduce net income while providing additional benefits to themselves and others. Potential adjustments to EBITDA might include:
- Excess owner compensation (above market rate)
- Unique owner benefits
- A company car
- Distributions to the owner and others
- Unique one-time expenses
- Above-market lease rates of seller owned real estate
- Charitable contributions
There are others, but in all cases they are options for the buyer and seller to evaluate in formulating a successful transaction.
But even though these adjustments are commonplace and generally accepted, buyers will challenge them. Why? Because of the maxim of all transactions: everything is negotiable.
If you are a potential seller, take the time to understand your adjustments, how they make sense for you and a future buyer. Your clarity will help you to be in a stronger position to make your case as a sales price is negotiated.