Before I enter into a rant about EBITDA, it's probably worth explaining for the young or uninitiated what EBITDA is a measure of, and how it's used to calculate (or has been recently used to calculate) the value of businesses across the board.
EBITDA stands for earnings before interest, taxes, depreciation, and amortisation. It means that you can calculate the profit related to a business, taking into account the income taken by the principal, tax paid, depreciation of assets, and amortisation.
It's adjustable, though, so it's a movable feast; when your practice or business is valued, it can vary significantly due to subjective factors or how people perceive your practice's performance.
EBITDA was not a concept when I was young, but it began to gain prominence, probably around mid-2010s to 2015s.
It's a movable feast EBITDA. You can negotiate the EBITDA, and so now we have a system called ‘adjusted EBITDA’, where you take the EBITDA, you negotiate the EBITDA, adjust it, and then you apply a multiple to this depending upon the business itself.
There's an article that was published recently by Christie & Co, the valuation company, which discussed the recent sale of Integrated Dental Holdings (Mydentist) and also another dental corporate from Spain. The link to the article is here if you're interested in this stuff.
The reason this is important for some people in dentistry is that people believe that the sale and purchase of corporate organisations around the EBITDA model defines how the market will perform, or in short, what your practice is actually worth.
As explained in the article, this is not necessarily true, but what's interesting about this is that we recently had the practice valued (not for a sale, but for an equity split model for some of the senior team), and we had this done by Christie & Co who wrote the article.
It's safe to say that the experience with Christie & Co was hugely disappointing.
The process for valuing our practice took more than five months, despite our prompt provision of all the requested information at the outset. They kept coming back and asking for more and more information. Why they couldn't ask for all the information at once for a practice like this, I'm not sure.
Apparently, the valuation was ‘signed off’ at board level but I'm not sure what that means but in the evaluation document and looking at the methodology of the evaluation, we were compared to other practice sales in other parts of the country for practices which were clearly entirely different and of an altogether different makeup to our practice (for example, large NHS contracts for which we have none).
And so it's interesting to read the article from the people who profess to be some of the experts in this area because the point of writing about this in a dental business blog is to let you know that the EBITDA valuation method is a complete load of sh*t.
It is entirely the emperor's new clothes, and the reason for this is, as in the case of IDH, your business could be carrying huge amounts of debt, but you don't measure the debt in the successful business model; you exclude the debt and just talk about earnings.
How can a business be stable and decent and good and have good prospects when they're carrying debt to the same level as the money they make?
Just think about your household income; it just wouldn't work.
And so, if you have a business which is not carrying any debt, yet continues to make a profit year on year, it should be a gold-plated gold standard business, but the EBITDA model does not reflect this.
The other thing that's worth considering in evaluations is that the multiple of EBITDA (the IDH sale looks to be around about 9.5 times EBITDA) is totally subjective and negotiable so not only is the adjusted EBITDA negotiable, but the multiplier is massively negotiable and therefore your value of the business goes back to what someone will pay for it in the current market.
And so the point is this; if you have a good business, it will have value within the marketplace, if you have a business which has good governance, has provided good financial results year on year on year with growth over a period of time, has a stable team, has well invested facilities and technology, you will be at the top of the tree and if you don't, you won't.
If you have a business that has been ‘geared up for a sale’, people will see that through your balance sheet, your P&L, and your accounts. It's hard to deceive people like this.
If there's a scramble for practices, you'll get paid more; if there isn't, you'll get paid less. However, what is really worth remembering is that the sale of businesses, including dental businesses like this, is a relatively new phenomenon.
In effect, most people are trying to cash out for the maximum amount of money; it's a greedy game.
So, you can try to skew the numbers in your direction or theirs, but realistically, what you're trying to do is take the most money out of somebody else's pocket to put into yours.
It's fine if that's your thing, but it's soulless, and be prepared for what it's like when you walk back in after everybody knows that you're sold out.
There are many ways to value your business, particularly if you're not selling it. You can value it based on its stability, you can value it based on its impact, and you can value it based on its reach and its influence. Financial metrics are only one metric, and perhaps not the greatest metric you will look at when you get to the other side.