Common Barriers to Increasing EBITDA for PT Private Practices

Common Barriers to Increasing EBITDA & Achieving Realistic Practice Valuation

ebitda physical therapy practice value

When attempting to determine a realistic valuation for their practice, owners often face several barriers, including unrealistic expectations and ignoring the buyer’s perspective. They underestimate the value of systems and processes when increasing EBITDA.

To accurately determine practice value, a common method is to calculate an industry-defined multiple of the practice’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This involves establishing the practice’s income after expense deductions and adding back interest, taxes, depreciation, and amortization.

Common Barriers to Achieving Realistic Valuation

Three barriers continue to surface when PT practice owners try to determine a realistic business sale value: 

Unrealistic Owner Expectations

Earlier, we mentioned the importance of maintaining growth goals. Your practice may have been busting at the seams pre-pandemic. But if you haven’t maintained that growth, your practice worth has diminished. 

Your business value is only as good as your current operation. To offer a future value proposition for buyers, you need to maintain consistent growth.

Ignoring the Buyer’s Perspective

A key factor to consider when planning to sell is whether the current state of your practice is an enticing proposition for an investor. Ask yourself these questions:

  • If you were the buyer, would you want to invest in this business?
  • What are buyers looking for?
  • Does your business meet these investment demands?

Underestimating the Value of Systems and Processes

The systems you have in place are key to maintaining operational efficiency and continued growth. For instance, inefficient and insufficient revenue cycle management systems mean the buyer will need to put these in place. Essentially, that requires more time and financial investment on their part. It also means slower initial growth. 

These factors are a noteworthy deterrent to investing in a business and a significant value downer.

How To Accurately Determine Practice Value

One basic way to determine your private PT practice’s value is by calculating an industry-defined multiple of your EBITDA value. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Basically, this is a projection of profitability. EBITDA is calculated on a trailing 12-month basis, excluding your salary as the owner.

Prior to selling a practice, it is important to look at all the ways one can potentially work on increasing their EBITDA.

Calculating EBITDA involves establishing your income (earnings) after all expense deductions and then adding back interest, taxes, depreciation, and amortization (debt repayment).

As a rule of thumb, PT practices can expect a business valuation of three times their EBITDA value for operations under $1 million. The multiple range increases with EBITDA value. Businesses over $1 million can work on a multiple of four to five times the amount.

Note that if you do adjust EBITDA by adding the owner’s compensation, the multiplier range will be smaller, generally between 2.5 and four. This is referred to as adjusted seller’s discretionary earnings (SDE).

A side note on increasing EBITDA:

 Some practice owners think they can easily increase their practice value (earnings) by joining with other businesses. But there’s a major limitation to this strategy. For this to work, all practices must operate according to the same revenue cycle management structure. There are strategies that owners should consider before this step when increasing EBITDA.

Owners should align all practice and financial management systems between stakeholders. This is a highly complex and costly endeavor. It’s also impractical as a quick fix for increasing practice value.

Growth Starts Here

Whether you’re hoping to sell your practice in two, five, or 10 years, the steps you take today can impact your business value. Schedule a strategy call with one of our experts and start your growth journey today. 

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