Calculating Urgent Care EBITDA

Enter the EBITDA calculation (earnings before interest, taxes, depreciation and amortization), the most widely used (and often misleading) method for valuing a business. EBITDA is used because of its simplicity; just take net income for the period (generally 12 months) and add back interest expense, taxes, depreciation and amortization over the same period. Simple, but not necessarily predictive.

You now have trailing 12-month EBITDA. What’s next? How is the number scaled? EBITDA multiples are generally reverse engineered from previous market transactions. The market value of the business, or the price paid for the business divided by EBITDA equals the EBITDA multiple. Values calculated using EBITDA multiples assume that the business being valued has a similar financial condition to the business from which the EBITDA was derived.

The comparisons require that the businesses with similar multiples have similar working capital ratios, operating margins, anticipated future growth rates and debt obligations, and how often is that the case?

EBITDA is calculated at a specific point in time and does not represent the value of the business if profitability during the period is not repeated in the future. It also fails to take into account the future capital requirements, including expenditures that are required to continue growing at the rate exhibited during the trailing 12 months.

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