A Plain-English Guide to EBITDA and Multiples
If you own a medical practice, there is a good chance you have asked yourself some version of the same question: what is this thing worth? Maybe a competitor was acquired down the street. Maybe a private equity group has been calling. Maybe you are simply beginning to think about what the next chapter looks like for you, for your partners, and for the patients and staff who depend on the practice every day.
Whatever the trigger, the answer almost always comes back to two concepts: EBITDA and multiples. Together, they form the shorthand of virtually every healthcare transaction in the market today. And yet, these are also the two terms most likely to be misunderstood, or worse, used against an owner who does not fully appreciate how the math is being constructed.
This post is meant to demystify both. No jargon, no finance degree required. Just a straightforward guide to how buyers think about value, and what you should be paying attention to well before a term sheet ever lands on your desk.
Start With EBITDA, Not Revenue
A common instinct among practice owners is to anchor on top-line revenue. It is, after all, the number you see every month. But buyers almost never value a medical practice on revenue. They value it on EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization.
In plain English, EBITDA is an attempt to measure the true cash-generating engine of your business, stripped of decisions that have more to do with how you financed the practice or how your accountant structured depreciation than with how the practice performs. It asks a simple question: if a buyer took this practice tomorrow, how much cash would it produce in a normal year of operations?
That framing matters because two practices with identical revenue can have dramatically different EBITDA, and therefore dramatically different values.
The Number That Really Matters: Adjusted EBITDA
Here is where most owners either leave money on the table or get tripped up in diligence. Reported EBITDA, the number that falls out of your tax return or P&L, is rarely the number a buyer will use. What they use is Adjusted EBITDA, sometimes called “normalized” EBITDA.
Private medical practices are typically run to minimize taxable income, not to maximize reported earnings. That is entirely rational, but it means your financials almost certainly include expenses a new owner would not incur, and compensation structures that do not reflect fair market value. The adjustment process, commonly referred to as add-backs, is where a good advisor earns their keep.
Common, defensible add-backs in a physician practice include:
- Owner compensation above fair market value. If you are paying yourself $900,000 and the market rate for your role and production is $550,000, the $350,000 difference is generally an add-back.
- Personal expenses run through the practice. Vehicles, travel, family members on payroll, country club dues, and anything else that would not continue under new ownership.
- One-time or non-recurring items. Legal fees from a concluded dispute, a one-time EMR implementation, a flood remediation, pandemic-era anomalies.
- Rent adjustments. If you own the building and charge the practice below-market rent (or above), rent should be normalized to a market rate.
- Non-operational income or expense. Investment income, charitable contributions, and similar items that are not part of running the practice.
Every one of these has to be documented and defensible. Buyers, especially institutional buyers, will scrutinize each add-back in quality-of-earnings diligence, and unsupported adjustments tend to disappear quietly from the final purchase price. The goal is not to inflate the number. It is to present an honest picture of what the practice earns.
What a “Multiple” Really Is
Once you have a defensible Adjusted EBITDA, a buyer applies a multiple to arrive at enterprise value. If your Adjusted EBITDA is $2 million and the multiple is 7x, the headline enterprise value is $14 million. Simple arithmetic.
What is less simple is where that multiple comes from. A multiple is, at its core, a shorthand for risk and growth. The higher the multiple, the more the market believes your earnings are durable, scalable, and likely to grow. The lower the multiple, the more the market is pricing in concentration, fragility, or uncertainty.
What Moves the Multiple
In healthcare specifically, a handful of factors tend to drive the multiple a practice commands.
- Size of EBITDA. This is the single biggest lever. A practice doing $750,000 of EBITDA and a practice doing $5 million of EBITDA will not trade at the same multiple, even within the same specialty. Larger platforms are harder to replicate, carry more sophisticated management, and attract a broader buyer universe. Smaller practices are often valued as tuck-in acquisitions to an existing platform.
- Specialty dynamics. Dermatology, ophthalmology, orthopedics, GI, cardiology, women’s health, and behavioral health have each attracted meaningful institutional capital over the last decade, and multiples reflect that. Specialties with heavier regulatory exposure or reimbursement pressure typically trade lower.
- Provider concentration. If 70% of the practice’s revenue walks out the door with one physician, a buyer will price that risk in aggressively. Distributed production across multiple providers supports a stronger multiple.
- Payer mix and reimbursement profile. Commercial-heavy practices generally outperform those heavily reliant on government payers. Contracts, rate trends, and ancillary revenue streams all factor in.
- Growth trajectory. Same-store growth, new service lines, open provider capacity, and a credible runway for de novo locations all push the multiple upward.
- Infrastructure. EMR maturity, clean financials, a real billing function, documented processes, and a management team that can operate without the owner-physicians all matter. Institutional buyers pay a premium for practices that look like platforms rather than sole proprietorships.
The Number Is the Starting Point, Not the Story
Valuation math is important. It is also the easy part. The harder and more valuable work is understanding why your practice will command the multiple it commands, and what can be done ahead of a process to move that number in your favor. Clean financials, rationalized compensation, diversified production, and a credible growth plan are not cosmetic. They are the difference between a good outcome and a great one.
If you are beginning to think about what your practice might be worth, we would welcome the opportunity to talk through your situation. That conversation costs nothing, and it often clarifies decisions that otherwise drift for longer than they need to.
Alexander Price & Co.
Healthcare Transaction Advisory
info@alexanderpriceandco.com | www.alexanderpriceandco.com
The information contained in this post is intended for general informational purposes and does not constitute legal, tax, or financial advice. Physicians considering a practice transaction should consult with qualified legal and financial advisors in addition to an exper
