What Is My Practice Worth? (How to Measure It)

Foreign [Music] show. Today's episode is titled, "What is my practice worth and how to measure this?" This is the EBITDA version. This is Dave Kittle, physical therapist. I'm the owner of Concierge Pain Relief Home Physical Therapy in New York City and the CEO of the Field Maker Group. We are currently speaking with practice owners looking to partner with them and acquire some or all of their practice in the New York and New Jersey area. Let's get into today's training. Totally free, no pitch. I have nothing to tell you other than we're acquiring practices, so that's that. Let's get into it.

By the way, uh, like I just said, we're acquiring practices and we're looking at outpatient physical therapy practices, as well as home physical therapy or home therapy companies in the New York and New Jersey area. Tricep area, basically. So, um, quick little question: Have you thought about taking some chips off the table? So you don't have to necessarily sell all your practice, but anyway, you can reach out and we can talk more and go from there.

So, like I said, today's slide presentation is titled, "What is my practice worth and how to measure it?" And I am showing slides. There is a slide presentation with charts and graphs and things like that. So it would be best for you to jump over to YouTube and watch it and focus on it, rather than just listen to this episode on Apple, iTunes, or Spotify. But either way, if you're working out or driving, keep listening. No problem. But for the best, uh, approach in this, uh, this training in this topic, if you're serious about it, then I suggest you allocate some time to jump in front of the YouTube, put some headphones in, and, uh, take a listen because I think it'll be a little bit more advantageous for you to kind of see the graphics and the charts and things like that to kind of tie everything together, rather than just listening to it.

So, like I said, I'm going to go over and show you exactly how to measure the worth of your private practice. And this is regardless of size, regardless of the scale or size of your practice, regardless if you have one location or multiple locations, regardless if you offer some in-home therapy in addition to having a brick-and-mortar outpatient physical therapy clinic, regardless, regardless. Very, very straightforward. So it's going to be similar to, it's going to be the approach to measure the worth of your practice, regardless of some of those tangibles or intangibles.

So, what is EBITDA? Here's everything you need to know about this confusing accounting word. So all these, uh, data points and all these numbers can be found on your financial statements. Can be found in your income statement. And we're going to be looking at the first line here, if you're look, if you're watching on YouTube, COGS or cost of goods. Which in physical therapy and the therapy world and in healthcare, there's usually not a cost of goods because we're not selling physical products or materials. So we're mostly focusing on the operating expenses, the non-operating income and expense, income tax, even though with EBITDA, not every tax component is, is, uh, included, but we'll get to that, uh, as well as focusing on net income. So let's get into it.

So EBITDA is an accounting term that is an alternative way to measure a company's profitability. EBITDA is a simple acronym: Earnings Before Interest, Taxes, Depreciation, and Amortization. Now, some of those multi-syllable syllable words, we're going to get into. We're going to kind of demystify. Very, very straightforward. Um, and I'm making this to kind of help more practice owners understand how they can value their practice and very simple ways. And it's not that complicated. So to calculate, even though you start with net income, also known as earnings, and then you add back things like interest, taxes, depreciation, and amortization. All right.

So again, on this chart from the income statement, you could see how things like, well, again, the COGS, the cost of cost of goods sold, usually not in the therapy world, but anyway, those are the things that would be going towards depreciation or amortization. You have your operating expenses, which kind of also feed into depreciation and amortization. You have your non-operating income and expenses, which are feeding into interest. And that's where that bucket goes into your income tax, which is obviously the taxes, the T of EBITDA, the tax component. And then your net income, which is going towards the earnings, the E of EBITDA, from net income. All right. Again, if you're listening, you're gonna kind of get half the story. If you're on YouTube, you'll be able to kind of see a lot more of this.

All right. So EBITDA is a non-GAAP number, meaning it does not comply with GAAP, meaning Generally Accepted Accounting Principles. For that reason, you won't see it on many companies or practices' financial statements. So it's kind of like a simple formula, but you have to kind of derive that number. You have to find that number out on a separate piece of paper. It's not on your traditional financial statements via your bookkeeper, your accountant, etc. However, some management teams do provide it and and they focus on it heavily.

So earnings, interest, and taxes are easy terms to understand. But what about depreciation and amortization? Those need a little bit more explanation. So depreciation, the accounting method used to allocate the cost of a tangible asset over its useful life. Something you can physically touch. A house, a car, an office, real estate, physical items. Depreciation represents how much of a tangible asset's value has been quote unquote used up, how much it's been used. Accounting method that spreads out the cost of a tangible asset over its useful life. Depreciation happens to tangible assets, again, that you can touch. So car, equipment. Again, with physical therapy in general, there's not a lot of capital expenditure. I mean, there is, but there's a couple thousand dollars in tables and and equipment, but it's not tens of thousands of dollars typically, unless you own the real estate, unless you own the outpatient physical therapy brick-and-mortar office. Um, then you would have that as a tangible asset.

So here's an example. You buy a new car for $33,000 and 10 years later, you sell that $33,000 car. You sell it for $3,000. So depreciation tracks the car's value decreasing over time as you drive it, you know, with wear and tear and using it and things like that. So in this case, the car's depreciation expense is $3,000 per year.

All right. So here's the, here's a graph and a simple little formula. You have a $33,000 car. You minus the $3,000. This is the numerator. A simple little division here. $33,000 divided by $33,000 minus $3,000. So you got $30,000 in the numerator, divided by 10 years, over the time that you're going from buying it to selling it, divided by 10 years, 10 in the denominator, equals $3,000 per year. So that's a simple, you know, back-of-the-envelope way to measure, uh, depreciation of this $33,000 new vehicle, this asset.

Now, amortization, the accounting process of writing down the value of a loan or an intangible asset. It's very similar to depreciation, but amortization happens to intangible assets, which are assets that you cannot physically touch. So that would be things like patents, copyrights, trademarks, uh, goodwill, things like that that are intangible. So in this chart here, amortization, the process of paying off debt through regular principal and interest payments over time, spreading out capital expenses related to intangible assets over the asset's useful life. So one of the practice owners that we're speaking with, he, uh, spent, I think it was almost $200,000 on a build-out of construction in the physical therapy office. So we'll obviously leaving that individual's name out and and we're not, uh, going into that. But that individual used a, a loan and a line of credit. And so basically that is debt where he's able to spread out that cost over time. And that is part of this, this bucket here of amortization.

Now, depreciation, as we mentioned, has a little bit of a recap. Happens to tangible assets, again, that you can touch. So cars, equipment, those $3,000, $4,000, $5,000 treatment tables, the high-low tables, um, any, you know, really expensive capital expenditure, building, real estate, if you own your therapy office. Whereas the amortization happens to intangible assets that you cannot touch. So it would be a loan, copyright, trademark, patent, whatever. And in physical therapy, there's usually not a lot of, I mean, there might be some copyrights, but there's usually no patents or things like that.

So why measure EBITDA at all? Why, why even, uh, do that? Even was popularized by one of the best owner-operators of all time. This gentleman named John Malone. John Malone became a billionaire primarily by buying and operating cable companies over several decades. This is decades ago. And here's a picture of John Malone and his book, "Cable Cowboy." I highly recommend this book. I listen to it on Audible. And if you're an Audible user, um, it's, and if you listen to business books and things like that and and marketing or things around business and management, you'll, you probably have seen it as like in a suggested list or something. But I highly recommend this book. I listen to it. It was very entertaining. It was going through how he was acquiring cable operating cable companies across the US and then eventually, it's a really interesting story. He bought up a ton of cable companies, rolled them all up together, eventually it was bought out, he sold. And then he became actually the largest landowner in the United States, more than Bill Gates, more than anyone. So by square footage, at least five or 10 years ago, this guy, John Malone, was the, the gentleman that owned the most real estate in the United States. The most, um, probably the private, not commercial real estate, but private based on square footage. So he owned ranches and farms and a ton of, uh, real estate. And that was going back to what we're going to go into in terms of his, uh, financial legal financial engineering.

So, uh, John Malone, he loved leverage. He loved using debt to grow. And he hated paying taxes. Now, a lot of business owners, we know we have to pay our fair share, um, but, you know, who likes paying taxes, right? So he, uh, John Malone, he used interest and depreciation expenses to minimize his tax bill. And a side effect of that is that it lowered the company's net income. So again, here's a chart going to the, uh, EBITDA, the income statement period. Here you have cost of goods sold, if they're, you know, higher depreciation, operating expenses, higher depreciation, non-operating income and expenses, higher interest expense. So higher interest expense, you're making, uh, interest payments, you're having more interest, you're making payments on either the interest or the principal because you're paying off a loan, you're using debt to grow, to probably use debt to buy acquisitions. That's what John Malone did. And therefore, you could see in this chart that therefore the income tax was lower. But then it also, as that side effect, it lowered net earnings. So if you're watching on YouTube, this will give you like a very straightforward depiction of that.

So lowering net income was a problem, uh, since it's an important number for investors and lenders. And John Malone convinced these lenders and investors to focus on cash flow instead of earnings. So, so EBITDA is a quick way to roughly measure a company's cash flow. So again, here's another chart, uh, and and this is basically saying like, hey, focus here, focus here on the operating income plus the depreciation and amortization, and less here in net income or or not here, but focus on the operating income and depreciation amortization. That's basically in a nutshell, uh, using EBITDA.

So John Malone, he succeeded and EBITDA was, uh, it became popular. It became a popular metric over the last, uh, 15, 20, maybe 25 years. It became a popular metric with a lot more investors, especially those in private equity. And you got to ask yourself, why? Well, because EBITDA ignores interest expense. So it allows companies with different capital structures to be compared.

All right. So here's another simple chart. Consider these two businesses. Consider two businesses with the exact same revenue and the exact same margins. Business A is funded with 100% equity, meaning someone ponied up the cash to to pay that same amount of cash for this business, not using any debt, no loan, no debt at all, no leverage, no debt at all. Business A funded 100% with equity, meaning someone had to pay 100% cash for that business. Whereas Business B is 50% equity and 50% debt. And you'll see the difference now. So Business A has no interest expense, so its earnings will be higher. Its earnings will be higher than Business B, even though the revenue and the margins are the same. So this is completely due to the capital structure, debt versus equity, not the business performance. So that's the caveat. So it's completely different and it's due to the capital structure of debt versus equity, not the business performance.

So now a further sub-chart of Business A versus Business B. Now you can look at both of their hypothetical income statements here where their non-operating income and expense, there's no interest. There's no interest at all because Business A was funded with 100% equity. Basically, think of it as like 100% cash. It's close, like there is no, there is no earn-out, there is no leverage, there is no debt. And so therefore, when there's no interest, then their net income, there would be higher earnings because some of the earnings would be pulled out to service the debt, service the loan debt, the monthly payments for that lender, for that investor, or whatever. Whereas Business B, 50% debt, 50% equity, you look at their income statement, their non-operating income and expense line of deriving their EBITDA, they would have higher, higher interest. They would have higher interest payments. So therefore, they would have lower earnings. They would be, they would be showing lower earnings.

So, so EBITDA fixes this problem because it's calculated before interest expense, making comparisons fairer or more fair. It also enables comparisons between companies with different depreciation and amortization expenses. So EBITDA has become very, very popular over the past 20 years. And that's in part because it enables Wall Street to justify higher borrowing power and higher valuations.

And now for you, the practice owner, the private practice owner, if you're a PT, OT, Cairo, physician, etc., and if you're listening and watching the show, if you hire a broker or advisor, then he or she will likely tell you about EBITDA. They'll teach you about EBITDA. They'll, they'll teach you and show you about adjusted EBITDA and the EBITDA number, plus add-backs. So adjusted EBITDA is the EBITDA number plus add-backs. And I've done other conversations, other episodes, other interviews about EBITDA and adjusted EBITDA where the add-backs are the owner perks and the non-vital or the non-recurring or personal expenses that are on the business books.

Here's a very, very simple formula to consider. You take your EBITDA, whatever that adjusted EBITDA number is that we're going to get to, we're going to give you a little case study and an example for a therapy practice. EBITDA times a multiple equals your clinic's value. Again, EBITDA times a multiple equals your clinic's value. Now, the multiple is subjective. The multiple is subjective. There is no formula for multiple. I mean, there's clusters of factors that have a sliding scale. A multiple is a sliding scale. So a multiple for a solo practice owner, a solo practice or a small clinic, that multiple might only be times one, but it might only be two times. And the larger a practice gets in healthcare, it's, you know, three to six, three to seven, but three times multiple, six, seven times multiple. It depends on the scale of the practice. It depends on how large it is. It depends on how many full-time therapists there are, full-time FTEs, full-time, uh, clinicians, full-time staff members. It depends on how many locations. It depends on the strength of the practice. But the multiple is a sliding scale. The EBITDA is closer to being, uh, actual reality and backed by real numbers. And the multiple is kind of a sliding scale. That's how you get your clinic's value.

Now, another way to look at it is EBITDA times multiple is also how a broker and advisor will typically come up with an asking price for your clinic, for your office. So if you deal with a broker, if you hire and retain a broker or an advisor, they're going to do some calculations. They're going to look at comparables. They're going to look at other exits and and other acquisitions over the recent quarter or the recent year that are similar to your size practice based on locations, based on headcount, based on financial performance and scale and growth and all that. And EBITDA times multiple is how your broker and advisor could come up with an asking price. Also, therefore, the buyers, like us, prospective buyers, are going to be looking at your EBITDA and a multiple of what they believe a multiple would be sufficient enough. And that's where an offer from a buyer would come from.

So basically, you have an adjusted EBITDA number times a multiple, and both sides have to kind of negotiate. Obviously, the seller, you, Mr. and Mrs. Practice Owner, you want a higher multiple. You want the highest multiple possible. And you want to disclose and you want to share some sometimes bloated or inflated adjusted EBITDA, or maybe just a, a pure reality adjusted EBITDA that's based off of your financial numbers, which it should be. But then the multiple again is the sliding scale and it's subjective. So the, the multiple is a, is a negotiation point because we're going to ask you, okay, so give us your, so here's your asking price of whatever, uh, you know, two million. So how did you get there? Can you, can you show? Can you share? Like, we'll already have known their adjusted EBITDA. We'll do our own calculations. Your advisor, your broker, etc., will do their own calculation. So it's not rocket science to figure out like, okay, if you have this asking price and this is your adjusted EBITDA, then obviously that you're, what you're saying is this is your EBITDA multiple, and it's, you know, 6.5. And and we think it should be like 3 or 3.5, right? So it just depends and it's a, it's a negotiation point for these deals, these transactions.

All right. So quick case study. Let's say with your therapy practice, your clinic, let's say it has an adjusted EBITDA of $1.2 million. Your revenue, therefore, would be much larger. So call it, uh, three or four or five million in that range, three, three to five million in top-line revenue. And then maybe your adjusted EBITDA after add-backs, after non-recurring, non-vital expenses that will not be there if someone like us buys your clinic, no personal expenses on the balance sheet or on the books or anything like that. Adjusted EBITDA of $1.2 million. And let's say we both agree on a, on an EBITDA multiple of 3.9. So you simply take $1.2 million times 3.9. And based on the equation above, your clinic would be worth approximately $4.68 million. And that would be the offer. That would be what we would put in a non-binding letter of intent, or that would be what we would, that would be what we would communicate as, hey, this is what we believe your practice is worth. So we might offer $4.6 million. But your clinic might be doing $5 million or $5.5 million in top-line revenue. So again, the revenue number is less important. We're really not typically used in how to find out, first of all, what's your practice worth, and also how, what's your asking price, and also, uh, what's a reasonable offer from us from prospective buyers. Keep that in mind, please. $1.2 million in adjusted EBITDA, based off of the things that we covered earlier in this call, times a market rate, a market rate multiple, so 3.9 in this example, based on the equation, $1.2 million times 3.9 equals $4.68 million. So you can see your goal as a practice owner is to negotiate the highest possible EBITDA multiple, as this will directly impact your clinic's purchase price, obviously. However, it must be based in reality, backed by your financials. So a financial reality, there needs to be financial reality here in terms of the adjusted EBITDA number. And then the multiple of that is the negotiation point. And then that's basically like, hey, are we in the same neighborhood? Are we in the same ballpark? Or is the, is the owner, the seller, are they asking for an EBITDA multiple that is just completely outside of logic and reason?

So does that make sense? Um, if not, you can check out the Dave Kittle Show. I've interviewed other folks. We've talked about adjusted EBITDA. One of the episodes that was really good about adjusted EBITDA and EBITDA multiples was with Iris Kimberg. Iris Kimberg, uh, interviewed her several months ago. It was a really great episode and we covered adjusted EBITDA multiples. She helps practice owners. I don't get anything out of it. I don't get any commission if you contact her, if you listen to the episode, if you reach out to her, but she does help practice owners get ready to exit and sell. Um, I don't get any commission or affiliate, you know, fee or anything like that. So, um, as mentioned before, we're currently speaking with practice owners about partnering with them and acquiring some or all of their practice. And if you're looking to take some trips off the table and possibly get out of certain roles like marketing or hiring and firing, or getting out of HR, or offloading billing and coding and revenue cycle management, or, you know, staff leadership training and all that type of stuff, that's what we're looking to do. We're looking to partner with practice owners to help them with that, to, uh, plug in our online marketing techniques and strategies that we use at Concierge Pain Relief. And if that sounds like, you know, if you're interested and want to talk more, um, it's never too early, never too early to touch base or communicate. So you can email me at Dave@conciergepainrelief.com. If you're listening right now on the show notes on iTunes and Spotify, there should be my email address on there. I think maybe even my LinkedIn link. You can click on that and connect with me on LinkedIn, or you can just take my email address there and shoot me an email. I'm also all over for social media, Twitter, Facebook, Instagram. If you just type my name, Dave, D-A-V-E, Dave Kittle, if you just type in Dave Kittle anywhere on on the Google machine or on any social media, you'll find me somewhere. And I'm either going to be talking about business or marketing, or maybe some healthcare, or Phillies and Eagles. And the Phillies are in the World Series right now. Shout out Phillies. And the Eagles are still undefeated. And so that I'm from South Jersey, so big Philly sports fan. Um, anyway, that's what I'll be covering, uh, that's what I'll be talking about, business, healthcare, maybe some marketing stuff, and, uh, and then Phillies and Eagles. So go Phillies, go Eagles. That's it for right now. Uh, connect with me, reach out. It will be a confidential conversation. So if you reach out to me, I do take these connections very seriously. So if you're just kind of kicking the tires and you're just kind of like, early stages, that's okay. Um, even reaching out to me, I, it does no good to share with others. If you are reaching out to me about potentially even potentially considering to sell or exit or sell some of your practice, it does no good for me to tell others about that. So it'll stay between you and I. Just want to let you know.

That's it for right now on the Dave Kittle Show. Send this episode if you find this valuable. Send this episode to one colleague, one practice owner, someone you met at PPS, someone you met at college, grad school, undergrad, whatever. If they're a PT, OT, if they own a practice, if they manage or direct or lead a practice, um, if they are a partner at a practice, specifically in the New York or New York, New York or New Jersey area, but anywhere in the country, really. If you find this valuable, share it with a colleague. Send them the link from the YouTube, the Spotify, the iTunes link. Copy paste it. Send it to them right now. Send them a text, send them an email. Just send it to one person. There's probably one person that thinks the way you think, that they're business-minded and focused on their practice and all that. Um, send it to one, one individual. I would appreciate that. That's all for right now. Rate, review, subscribe. If you find this valuable, and that way you will be notified of future episodes when they're published. That's it for right now on the Dave Kittle Show. Thank you. Bye.

Hey, it's Dave Kittle. Are you a healthcare business owner or physical therapy practice owner who is looking to figure out your succession plan or exit strategy? We might be able to help. And in fact, we may be interested in acquiring your practice. If you're interested, you can reach out to me. Shoot me an email at Dave@conciergepainrelief.com. That's D-A-V-E at C-O-N-C-I-E-R-G-E painrelief.com. Or you can call me at any time, 646-781-884.

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