If you’ve had any conversations about selling your practice, you’ve heard the term EBITDA. It’s the metric buyers use to evaluate healthcare practices, and understanding it puts you in a much better position to assess any offer you receive.
What EBITDA means
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s calculated by taking your net income and adding back those four categories of deductions. The result is a measure of operating profitability that strips out financing decisions, tax strategies, and non-cash accounting entries.
The reason buyers use it is consistency. Two practices with identical revenue can have wildly different net incomes depending on their debt structure, how the owner takes compensation, and what’s been depreciated. EBITDA normalizes those differences so buyers can compare practices on an apples-to-apples basis.
EBITDA vs. SDE: which one applies to your practice
EBITDA is the standard metric for corporate and private equity buyers. But there’s a related metric used in smaller, doctor-to-doctor transactions: Seller’s Discretionary Earnings (SDE).
SDE adds owner compensation back on top of EBITDA, reflecting the total economic benefit an owner-operator receives from the business. It’s typically used for smaller practices under $2M in revenue selling to individual buyers who will also work in the practice. For anything going to a corporate or PE buyer, EBITDA is the right metric. Learn more about how SDE works and when it applies.
How EBITDA affects your valuation
Buyers arrive at an enterprise value by applying a multiple to your EBITDA. The multiple reflects how much risk they’re taking on and how much growth potential they see. In healthcare M&A, multiples typically range from 2x to 7x depending on specialty, market, and practice characteristics.
A $500,000 EBITDA practice might receive offers ranging from $2.5M to $3.5M depending on whether buyers see a well-run, diversified practice with upside or a provider-dependent business with transition risk. The EBITDA is the same – everything else drives the multiple.
Getting your EBITDA right
The EBITDA figure buyers see isn’t always your reported net income plus four simple add-backs. Practices often have legitimate adjustments – called add-backs – that increase the adjusted EBITDA figure materially. Common examples:
- Above-market owner compensation – if you’re paying yourself $600K when a market-rate replacement would cost $250K, the difference is an add-back
- One-time expenses – equipment purchases, legal fees, or unusual costs that won’t recur
- Personal expenses run through the business – vehicle, travel, or other discretionary items
- Family member compensation above market – salaries paid to relatives at above-market rates
Working through this exercise with a qualified advisor before going to market can meaningfully increase your adjusted EBITDA – and therefore your enterprise value. Most practice owners are surprised by how much legitimate add-backs improve their number.
Talk to PTG about what your adjusted EBITDA might look like and how it would affect your valuation in today’s market.
Frequently asked questions
What does EBITDA stand for?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures a business’s operating profitability by removing financing costs, tax obligations, and non-cash accounting entries from net income. Buyers use it to compare practices across different ownership structures and financing arrangements.
Why do healthcare practice buyers use EBITDA instead of net income?
Net income is affected by how the owner structures compensation, debt, and tax planning – none of which tells a buyer how the underlying business performs. EBITDA strips those factors out to show the actual cash-generating power of the practice, making it a more reliable basis for comparison and valuation.
What’s the difference between EBITDA and adjusted EBITDA?
Adjusted EBITDA starts with the standard EBITDA calculation and then adds back discretionary or one-time expenses that won’t recur under new ownership – such as above-market owner compensation, personal expenses run through the business, and non-recurring costs. Adjusted EBITDA is what buyers actually use to build their offer models.
How is EBITDA used to determine a practice’s sale price?
Buyers apply a multiple to the adjusted EBITDA to arrive at an enterprise value. The multiple depends on specialty, practice size, payer mix, provider concentration, and growth trajectory. For example, a practice with $500,000 in adjusted EBITDA and a 6x multiple would have an enterprise value of $3,000,000. The key variables are both the EBITDA figure and the multiple buyers are willing to apply.
