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EBITDA and Deferred Consideration of the Price

EBITDA (Earnings before interest, taxes, depreciation, and amortization) it`s an accounting acronym and a very widely popular variable used to understand the true operating profit and the actual cash generated from a business, in the specific from a dental practice.

Banks and Lenders frequently use the EBITDA methodology to determine the ability of a purchaser to service the debt level.

It is worth considering that the EBITDA does not take into consideration the capex cost (the funds needed for capital investments), such as the need to add a surgery, usually at an average cost of £50,000 fully kitted and functioning surgery.

Banks and Lenders frequently use the EBITDA methodology to determine the ability of a purchaser to service the debt level.

It is worth considering that the EBITDA does not take into consideration the capex cost (the funds needed for capital investments), such as the need to add a surgery, usually at an average cost of £50,000 fully kitted and functioning surgery.

To establish the EBITDA level during a valuation process, we remove costs such as depreciation and all other costs that an incoming buyer and new practice owner will not continue to sustain.

Once the EBITDA figure has been established, this is multiplied taking into consideration the type of practice, the location and other important driving factors.

The deferred consideration of the agreed dental practice sale price is often driven by the personal goodwill related to the business, i.e. the personal work carried out by the principals, the value related to the personal input of the principals.

The deferred consideration of the agreed sale price is part of the business price kept by the buyers and released over a period of time, once that the agreed terms are achieved, as a way of minimizing the risk on the investment and maximizing the goodwill protection.

It commonly applies to private and specialist practices, less relevant to NHS or associate led practices but still applicable in certain circumstances.

A frequent deal structure is as follow ; a payment of 75% of the agreed price is agreed on completion, followed by a payment of 25% of the agreed price over a period of time ( between 3-5 years ) subject to terms such as maintaining practice income or sustaining personal income.

We always analyze the intangible asset and scrutinize the personal goodwill compared to the commercial goodwill of the business, which can drive not only the price but also the terms of the deal and the length of time that a buyer would request a seller to stay in the business post completion , to minimize their risk of investment.

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