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What is EBITDA and Why Is It Important For Your Vet Clinic?
You’ve probably heard the term “EBITDA” before, but you might not know precisely what it means or why it’s essential for your vet clinic. This article will explain everything about EBITDA, including how to calculate it and when you should use it.
Without a crystal ball, it can be challenging to spot the subtle signs of financial trouble when you own your veterinary clinic. But don’t worry, there’s an easy way to learn about the financial health of your vet clinic: EBITDA!
What is EBITDA?
This is a question we get asked often, and it’s understandable. EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization, but what does that mean?
EBITDA is a measure of profitability that doesn’t apply “real” costs to the picture by measuring how much a business makes before accounting for interest payments, tax deductions, depreciation costs, and other financial subtractions.
We know from practice that taxes and accounting can get a little confusing and our goal is to simplify the sometimes complicated world of taxes. However, we are not accounting or tax professionals. So, If you’re still a little fuzzy on the details, we recommend hiring an accountant at a reputable firm.
EBITDA is calculated by subtracting the firm’s interest expenses from its operating income(before depreciation) to get a figure that represents how much money the company makes in operations each year before paying any debt service expenses or taxes (including self-employment taxes).
Let’s look into various factors that constitute EBITDA:
Remember EBITDA is Earning Before Interest, Taxes, Depreciation, and Amortization.
Now let’s look at each of these elements.
Interest: This is essentially the cost of borrowing money from a bank or other lender to buy your vet practice or fund your business operations. So because EBITDA calculates your profits before taking into account interest charges, the value does not change whether or not you borrowed money to finance your vet practice.
Taxes: The significant taxes considered in EBITDA calculation are federal and state income taxes. The general rule is that EBITDA does not include real estate or sales taxes. However, this rule is suspended when your vet clinic lease mandates it to pay real estate taxes. The same thing happens when the clinic pays sales taxes on products. Lastly, now that you’re looking to sell your vet clinic, buyers may ignore your tax situation, and instead, they will consider what they fancy.
Depreciation: The third item is depreciation which represents the loss in value of capital assets over time (for example, buildings or equipment).
Amortization: It represents an allocation of costs over time for intangible assets such as trademarks or patents.
EBITDA Is Not Profitability
EBITDA can be misleading because it does not consider all the expenses that go into running a business. Using EBITDA as an indicator of profitability could lead to some serious financial mistakes. That’s why we recommend you always check with a professional for your vet practice valuation before making decisions based on EBITDA alone!
Here’s how EBITDA differs from profitability:
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Why is EBITDA Important?
In the vet practice industry, especially when it comes to buying and selling vet clinics, EBITDA is sometimes used in the place of cash flow when the accounts receivable are few.
Therefore it is not uncommon to see potential buyers use the multiple EBITDA of your vet clinic to arrive at a proposed purchase price. For example, as of 2021-22, multiples of EBITDA widely used ranged from 10-18x. But ultimately, it depends on many factors, including location, the specialty of the practice, size, growth potential, quality of clientele, and the likes.
What does this mean for you, a veterinary clinic owner?
One way to command a high purchase price for your practice is to strive to improve the value of your EBITDA. From our experience, buyers were willing to pay more for clinics with substantial revenue over the years.
But there’s a problem:
EBITDA is a flawed metric for gauging the profitability of your clinic. Hence it will fail to account for the actual value of your vet clinic. So, even though EBITDA is popular among those buying veterinary practices, chances are high that you won’t get a fair price for your business when multiples of EBITDA are used to calculate the worth of your veterinary clinic during a sales negotiation.
Don’t despair- there’s a better option (AND IT’S FREE!):
We want to ensure that you get the most for your vet practice, and the best way to do that is by giving you a free veterinary practice evaluation. Our team of expert financial analysts has helped hundreds of veterinary practices like yours to evaluate their businesses and maximize their value.
We will conduct a thorough analysis of your business, including:
- Detailed financial statements
- Market analysis
- Industry trends
- Competitive analysis
- And many other factors
And the best? We won’t charge you anything at all!