Keys to Maximizing Your EBITDA and Valuation

By Brannon Moncrief, CEO & Principal, McLerran & Associates

As sell-side advisors, we are often asked this question: What is the key to maximizing the valuation of my business? The answer is simple … EBITDA is THE primary factor that influences value from the perspective of DSO and private equity buyers. Therefore, it’s critical to design your business in such a way that allows you to achieve/maintain an EBITDA margin in the range of 20-25% of revenue. Here are several considerations when it comes to increasing revenue and controlling overhead, both of which will lead to operating a more efficient business and ultimately maximizing your EBITDA and valuation:

Strategies to Increase Revenue

  • Implement a Staff Bonus Plan to Align Incentives
  • Negotiate More Favorable Reimbursement Rates with Payors
  • Consider Dropping PPO Plans with the Lowest Fee Schedules
  • Increase Production Capacity by expanding your Operating Hours and/or Facility
  • Expand Service Mix to include Specialty Procedures 
  • Add Additional Providers, Specialists, or Hygienists 
  • Ensure All Cash Collections are Being Reported
  • Improve/Streamline Your A/R Collection Process and/or Offer Additional Patient Financing Options
  • Develop New or Optimize Current External Marketing (Advertising) and Internal Marketing Processes (encourage patient referrals and reviews)

Initiatives to Decrease Overhead

  • Review Your Profit & Loss Statement on a Monthly Basis to ensure the following expenses are in line with industry benchmarks (stated as percentage of net revenue):
    • Staff Salaries/Payroll Taxes/Benefits – 20-28%
    • Occupancy Costs (Rent/Utilities) – 5%-8%
    • Dental Supplies – 5-7%
    • Lab – 6-8%
    • Marketing – 1-3%
    • Office Supplies – 1-2%
  • Analyze ROI from Marketing Activities & Other Variable Expenses on an Ongoing Basis
  • Centralize or Outsource Administrative Tasks
  • Curb Discretionary/Personal Write-Offs 1-2 Years Prior to Sale (or Categorize all Personal/Discretionary Expenditures into a Specific Expense Category for Easy Tracking)
  • For Multi-Location Practice Owners, Consider Offloading Underperforming Practices 

In addition to focusing on maximizing your EBITDA, it’s also important to understand the factors that impact your EBITDA multiple at exit:

Factors That Drive the EBITDA Multiple

  • EBITDA Level – Practices with EBITDA of $1 – $5 million are acquisition targets for both financials and strategic buyers and therefore tend to trade for the highest multiples. 
  • Reputation, Culture & Long-Term Sustainability – This speaks for itself.
  • Key Person Risk – Bifurcating production between multiple providers will decrease key person risk, so long as all providers are willing and able to continue working long-term post-closing.
  • Growth Potential – Buyers love to hear that your business is positioned for growth, and this can incentivize them to offer a top-of-the-market EBITDA multiple given they have a strong path to increasing EBITDA post-closing.
  • Seller’s Post-Closing Plans – You need to be prepared to have a vested interest in your business for 3-5 years post-affiliation. Typically, the longer the seller’s runway, the higher the EBITDA multiple.
  • Payor Mix – Demand and valuation is typically adversely impacted when Medicaid exposure reaches over 20% (pediatric dental practices are the exception to this rule). 
  • # Locations – Multi-site practice typically trade for slightly higher EBITDA multiples than single site offices, but it’s important to keep in mind that more locations equals more overhead and a lower EBITDA margin. In other words, make sure you scale with intentionality. More locations does not always equal higher EBITDA/higher valuation.
  • Facility/Equipment – Just like in real estate, the “curb appeal” of your offices can influence the valuation. Investing in new equipment/technology and a modern, attractive facility will result in revenue growth and operating efficiencies and decrease future CapEx.

We encourage you to employ the above strategies and have your EBITDA evaluated on an annual basis to ensure you are in the position to maximize your outcome from a DSO affiliation or private equity partnership when you are ready to monetize your business.

Brannon Moncrief has over 20 years of dental industry experience as a banker, practice broker, and sell-side advisor. Brannon is the Principal, CEO of McLerran & Associates, a nationwide firm specializing in providing sell-side advisory to large dental practice owners (and specialists) seeking a DSO affiliation or private equity partner.