Calculating Urgent Care EBITDA

Valuation methods involving forecasted earnings and discounted cash flow are more plausible but require predictions about future earnings and cash-flow projections that are based on historic data, industry trends, and management’s view of the future economic environment. But by making the right assumptions, it is possible to reverse engineer the projections to arrive at the same value that EBITDA predicts (like the tail wagging the dog).

With the amount of information available and the uncertainty of future projections, it is reasonable to adjust the EBITDA calculation to reflect free cash flow to the equity holders. Free cash flow is the available cash during the period after the current portion of long-term obligations are satisfied. The sum total of cash available to the equity holders discounted using the appropriate risk premium, is the net present value of future cash flows, or the current value of the business. EBITDA valuation assumes that the trailing 12-month period will be consistently repeated, not necessarily true.

A business education and decades of experience are behind these methodologies and are difficult to distill down in a few paragraphs. The net result: the value of a business is the amount of cash it generates in today’s dollars. EBITDA is a useful tool, but valid only in a stable, consistent business.

Glenn Dean, MBA, CPA, is a consultant and entrepreneur specializing in corporate finance, operations and strategic planning. He can be reached at gldean@cox.net.

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