Calculating Urgent Care EBITDA

Fear and Loathing in Las Vegas—a savage journey to the heart of the American dream, a box-office flop by most financial measures—little did I know the sequel was currently playing in the heart of “Sin City.” And as Oscar Wilde’s aphorism predicts, life does, indeed, imitate art.

My trip to Vegas was planned in haste, desperation to save a failing clinic. The difficulties were apparent: fewer patients, declining revenue per patient, shrinking bank balances, delayed payments to vendors and creditors, and concerned investors. As I listened to the physician/owner tell his story, it felt like déjà vu.

Like a movie I have seen numerous times before, the twists and turns of the story were predictable. However, this script had an alternate ending. Instead of discovering why the business was declining and what could be done to increase patient volume and become more efficient, the owner said, “What’s the business worth?” It caught me by surprise.

His question was followed shortly with, “I heard that it is worth five times trailing 12-month EBITDA.” I hesitated to answer; my mental image was one of an individual who had just learned a new phrase in an unfamiliar language. “Well, it’s not quite that simple,” I said. To a former emergency room physician who makes decisions quickly before moving onto the next challenge, my answer lacked conviction.

But, his question is worth pondering. What is a business worth? How is it fairly valued for both buyer and seller? Generally speaking, a business is worth the net present value of all future cash flows, or discounted future cash flows based on a risk-premium rate, the rate that investors demand based on the uncertainty of future cash flows. The greater the uncertainty, the higher the rate. This method requires sophisticated and proven planning procedures and effective results tracking—processes that are rare for a small and emerging business.

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