Short, Sweet and Super Important (Part 2)
Andy Acton of Frank Taylor & Associates continues his explanation of the importance of understanding your business’ EBITDA.
‘We’ve already discussed why understanding the underlying financials are a key part of our valuation process. I’d hesitate to say that ‘the devil is in the detail’ as the calculations aren’t fiendishly complicated, but it is important to understand what items are excluded from (or included in) the EBITDA calculation and why’.
‘Non-operating income, put simply this is income the business gets that isn’t generated by its normal operating activity. For example, in the case of a dental practice, interest earnt on a deposit account balance wouldn’t be included in the EBITDA; the clue is in first part of the name, the “EBI bit’ means earnings before interest. It’s really because the practice’s core business is to provide dental care to its patients, not to invest funds or ‘play the markets’.’
‘One-off revenues or expenses, whilst these are unavoidable from time to time, the very fact they are unusual means they aren’t part of the day-to-day underlying costs or revenues for the practice and should be excluded from EBITDA. Typical items in this category might be legal or restructuring costs and it could be argued that some of the costs incurred during the COVID pandemic to enforce social distancing in a practice, or indeed any commercial premises, such as the installation of perspex screens at counters and tills, are one-offs. They were necessary to keep the business going but won’t be regular annual costs as, we hope, the pandemic was a once in a lifetime event.’
‘The write-down of an asset. This may arise if an asset, for example a piece of technology, has become obsolete as newer models have overtaken it. When this happens the accountant would reduce the value of the asset to the business by writing it down, which is ‘finance speak’ for recognising it’s worth to the business is no longer what it was. It’s effectively an acceleration of the depreciation and again the clue is in the name (the “D” of EBITDA is depreciation). Again, if this is necessary, the write-down isn’t indicative of the health or otherwise of the practice, merely acknowledgement of technological advances and is just a booking keeping entry rather than a cash payment.’
‘Another example, and often key in practice sales and purchases, is the treatment of goodwill. Goodwill is the value of the business over and above the value of its physical or tangible assets (building, furniture, machinery e.g.). The reduction in the value of goodwill can be recognised by amortising it, which really means reducing its value over a period of time. Much like the write-down of an asset, amortising this goodwill is really only a bookkeeping entry, and not part of our EBITDA calculation (it’s the “A”).’
‘Also worthy of consideration is the compensation for the owner of a business. In private companies, owners often pay themselves more than a comparable executive role would pay an employee. A buyer will usually adjust the owner’s salary to the market ‘norm’ and as a result the EBITDA calculation will need to be amended to reflect this.’
‘Whilst this isn’t an exhaustive list, I hope it captures the more commonplace items that the calculation needs to accommodate. If you want help in getting a professional valuation of your practice, call us on 0330 088 1156 for further advice.’
Practice - Midlands
Practice location: This well-established practice is located in a large city within a mix of residential and commercial properties. It was established over 70 years ago.
Practice type: This is a five-surgery mixed practice and is being sold to facilitate the retirement of the principal. It is being sold as leasehold with a new 15-year lease in place.
Practice financials: The gross fee income from management information for the past 12 months is in the region of £950,000 per annum and the NHS-GDS contract has a UDA rate of just over £27.00 per UDA. The income is generated by the principal working three days a week, with four associates working a combined 16 days a week and two hygienists working a combined three days a week. They are supported by a practice manager, a full-time receptionist and nine full time dental nurse/receptionists.
Price achieved: A price of £1,250,000 was achieved which was slightly in excess of the asking price.
Agent's comments: The existing principal is happy to stay on post completion for several years and was really looking forward to being able to focus on his clinical activity. The practice has been extremely well run and the incoming principal who is already a practice owner sees this as a real fit within his business portfolio. Overall buyers are showing a deeper business understanding and clarity when they are offering on practices.
Number of people looking in the area: 1,045
Practice - Dorset
Practice location: This practice is situated on the coast in a busy town and having been established for over 60 years has a glowing local reputation.
Practice type: This is a very well established two surgery mixed practice which is being sold to reduce the responsibilities of the practice owner. The practice occupies the ground floor of a converted residential property and there is an option for the new principal to buy the upstairs of the property which is currently a two-bedroom flat.
Practice financials: The gross fee income from management information for the past 12 months is in the region of £400,000 per annum and the NHS contract has a UDA rate of just over £25.00. The gross has been generated by the principal working full time, a hygienist working one day a week and are supported by a full time receptionist and three part time nurses.
Price achieved: A price of £550,000 was achieved which was in line with the asking price.
Agent's comments: The practice is ready for rejuvenation and redecoration and the exiting principal is so pleased he is handing over to a first time buyer who is keen to do just that! The existing patient base is well established but there is defiantly an opportunity to develop the practice.
Number of people looking in the area: 647
Practice - Yorkshire
Practice location: The practice is based in one of the largest towns in the region and is very much in the heart of the town. The town benefits from excellent road and rail links and has been established over 50 years.
Practice type: This is a four-surgery mixed practice, being sold as freehold. It is located in a two storey previously residential property which has ample parking for staff and free street parking which is always a bonus.
Practice financials: The gross fee income is in the region of £800,000 and 70% of the income is generated by a NHS-GDS with just over £33.00 per UDA. The income is generated by the principal working four days a week, two full time and one part time associate working a combined 14 days a week and a hygienist working 4 day a week. The team are supported by a part time practice manager, six part time nurses/receptionists.
Price achieved: A price of £1,450,000 achieved which was in excess of the asking price.
Agent's comments: This practice generated a lot of interest from a range of buyers which included first time buyers to small corporates and as a result we were able to go to a sealed bid process and secured an above asking price offer which is sufficient to cover the sellers’ professional fees for the sale.
Number of people looking in the area: 932
Practice - Midlands
Practice location: The practice is based in an affluent suburb of a large town in the Midlands and has been established for over fifty years.
Practice type: This is a five surgery, mainly private practice being sold to facilitate the retirement of the principal. The practice occupies a corner spot of a parade of shops with ample parking at the practice along with free street parking directly outside. The practice is very well presented and is being sold as freehold.
Practice financials: The gross fee income from management information for the past 12 months is in the region of £800,000 of which 92% is private and 8% is NHS with a UDA rate of just above £28 per UDA. The income has been generated by the principal working five days a week, two full time associates and two hygienists working a combined 4 days a week. The team are supported by a full time practice manager, two full time nurse/receptionists and five part-time nurses.
Price achieved: A price of £1,600 ,000 was achieved and was slightly in excess of the asking price.
Agent's comments: This practice has been incredibly well run and looked after by the current principal, state of the art equipment and a robust attitude towards marketing has really paid off. The exiting principal wanted to leave whilst he was still enjoying the role of practice owner and the incoming principal feels very confident that with the two full time associates remaining, he will be able to continue to grow and develop the practice in the future.
Number of people looking in the area: 1,045