While there are a number of ways to calculate a fair market value for a practice, this tends to be one of the most popular approaches because there is a robust market for dermatology practice sales.įor a simple dermatology practice with no unusual activity, EBITDA is calculated by subtracting all expenses except interest, taxes, depreciation, and amortization from net income. Furthermore, because EBITDA is a proxy for the cash flow generated by a practice, investors can apply a valuation multiple to the EBITDA to estimate a practice’s value. While there are significant limitations to the use of EBITDA, it has become a popular metric because analysts can easily compare operating performance of similar companies in the same industry. One of the most common transaction details reported is the EBITDA multiple. When a sale is completed, the high-level transaction details are often reported. Your expert team will typically set up the financial pro forma to calculate and report EBITDA.ĮBITDA is the acronym for Earnings Before Interest, Depreciation and Amortization. The purpose of the pro forma is to help the seller understand the potential of the practice and how its performance might look in the event of a sale. Some of the more common assumptions used by sellers when developing their financial pro forma might include: The impact on physician salaries under a new compensation system The effects of eliminating family members from the practice’s payroll How eliminating certain “personal” expenditures like travel, meals and entertainment, and automobile expenses will effect the practice’s expenses The results of adding a new dermatologist or advanced practice provider to the practice Or the effect of adding new laser procedures to the practice, for instance. These assumptions often include material events such as a potential merger or acquisition, a new capital investment or divestiture, a major operating change, or a change in capital structure.Īs a potential seller, developing a financial pro forma for your practice will help a prospective buyer anticipate the financial results of the practice in the event of a sale. The next step, which we’ll cover herein, is developing a financial pro forma with the help of your expert team, which at a minimum should include a seasoned medical practice appraiser, an experienced tax accountant, and a healthcare transaction lawyer.Ī financial pro forma is a set of financial projections used by the practice to help potential investors or creditors anticipate the financial results of the practice based on a set of assumptions. And, we covered the need to analyze and benchmark your practice. We also looked at the need to understand the difference between the two most common type of transactions-a capital sale and an asset sale. In previous months’ Selling Your Practice: Analyze Your Practice, we discussed important topics such as why so many physicians are selling their practices, the need to continue to run and grow your practice while preparing to do so, to prepare early, and to assemble a team of experts.
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