Definition
Adjusted EBITDA is a measure of your practice’s true operational profitability. It starts with your Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) and then “normalizes” this figure. Normalization means adding back expenses that are owner-specific or are one-time events, such as your personal auto lease run through the practice or the cost of a major office renovation.
Think of it like staging a house for sale. You remove personal photos and fix a leaky faucet to show a buyer the home’s potential, not just how you live in it. Adjusted EBITDA shows a potential buyer the sustainable cash flow your practice generates, independent of your personal financial decisions.
Why This Matters to Healthcare Providers
Your practice’s sale price is almost always calculated as a Multiple of your Adjusted EBITDA. A higher, well-documented Adjusted EBITDA directly leads to a higher valuation and more money for you at closing.
Example in Healthcare M&A
Scenario: Dr. Evans is a cardiologist preparing to sell her practice. To minimize practice-level taxes, she pays herself a $700,000 salary. A fair market salary for a cardiologist with her workload is closer to $450,000. Her practice’s reported profit seems low because of this high salary.
Application: During the sale process, an M&A advisor calculates Adjusted EBITDA. They add back the $250,000 difference between her actual salary and the market-rate salary ($700,000 – $450,000). This adjustment is not “creating” money; it separates her compensation as an owner from the underlying profitability of the practice.
Outcome: This single adjustment increases the practice’s Adjusted EBITDA by $250,000. If the practice sells for a 7x multiple, this adjustment adds $1.75 million ($250,000 x 7) to the final purchase price. The buyer now sees the true earning power of the practice they are acquiring. The entire process is verified through a formal Quality of Earnings (QoE) report.
Related Terms
- EBITDA – The foundational metric from which Adjusted EBITDA is calculated.
- Multiple – The factor applied to your Adjusted EBITDA to determine your practice’s enterprise value.
- Quality of Earnings (QoE) – The in-depth financial analysis that buyers use to verify your Adjusted EBITDA calculation.
Physicians who understand EBITDA optimization typically achieve 25-40% higher valuations. Maximize Your Practice Value →
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Frequently Asked Questions
What is Adjusted EBITDA and how is it calculated?
Adjusted EBITDA is a measure of a practice’s true operational profitability. It starts with Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) and then normalizes this figure by adding back owner-specific or one-time expenses, such as personal auto leases or office renovations.
Why is Adjusted EBITDA important for healthcare providers?
Adjusted EBITDA is important because the sale price of a medical practice is almost always calculated as a multiple of Adjusted EBITDA. A higher and well-documented Adjusted EBITDA leads to a higher valuation and more money at closing.
Can you provide an example of Adjusted EBITDA use in healthcare M&A?
Yes. For example, Dr. Evans, a cardiologist, pays herself $700,000, but the fair market rate is $450,000. The M&A advisor adds back the $250,000 difference to calculate Adjusted EBITDA, increasing it by that amount. With a 7x multiple, this adjustment adds $1.75 million to the purchase price, showing the true earning power of the practice.
What related terms should be understood with Adjusted EBITDA?
Related terms include EBITDA (the foundational metric for Adjusted EBITDA), Multiple (the factor applied to Adjusted EBITDA to determine value), and Quality of Earnings (QoE), which is a financial analysis used to verify Adjusted EBITDA.
How can understanding EBITDA optimization impact practice valuation?
Physicians who understand EBITDA optimization typically achieve 25-40% higher valuations for their practice, enhancing the sale price and financial outcome.