As a dental practice owner, you might have heard the term “EBITDA” tossed around, but what exactly does it mean for you and your business? If you’re aiming to grow your practice or even consider selling it one day, understanding EBITDA for dental practice can help you measure your practice’s financial health and overall value.
In this post, we’ll break down what EBITDA is, how it’s used, what the average is for dental practices in 2024, and what to do if your numbers seem low. Let’s dive in!
What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a measure of how much income your dental practice generates before accounting for specific expenses like loan payments or taxes.
Think of it as a financial snapshot that focuses solely on your practice’s operational profitability, providing a clean comparison across practices and helping assess its financial health.
EBITDA is one of the top 5 dental KPIs we recommend tracking—check out the other four here.
Dental Practice EBITDA vs. Net Profit:
What’s The Difference?
Unlike net profit, which fluctuates based on factors like debt or tax strategies, EBITDA focuses on core business operations.
For example, if your practice brings in $2 million in revenue, after covering operating expenses like staff salaries and supplies, your EBITDA shows the profit left before factoring in taxes or interest. This makes it especially useful for comparing practices or when considering mergers, acquisitions, or bringing on a partner.
EBITDA provides a cleaner, more standardized view of performance across the board.
What is EBITDA Used For?
EBITDA is a key component when it comes to figuring out the value of your dental practice.
Whether you’re trying to secure a loan, bring in new partners, or even thinking about selling, having a healthy EBITDA makes all the difference. We always recommend keeping an eye on it regularly—think monthly or quarterly—so your practice is always in good financial shape.
Here’s how EBITDA can be used:
- Valuing Your Practice for Sale or Merger: If you’re planning to sell, buyers will use EBITDA to help figure out how much your practice is worth. A higher EBITDA usually means a higher price tag. For example, if your EBITDA is $1 million, your practice could sell for 5-7 times that amount, depending on the market.
- Securing a Loan: Lenders look at EBITDA when you’re applying for a loan. If it’s solid, it shows them your practice is profitable and can handle the debt. Whether you’re opening a second location or upgrading your equipment, having a healthy EBITDA helps you get the financing you need.
- Attracting Investors or Partners: Investors love a good EBITDA. It shows them your practice is profitable and has room to grow. If your EBITDA is consistently high, it’s a signal that your practice is in good shape and worth investing in.
The key here is reviewing your EBITDA regularly. Think of it like making sure your practice is always ready for whatever comes next, whether it’s selling, getting a loan, or just keeping things running smoothly.
You don’t want to wait until something big happens and find out your practice isn’t in the best shape. By keeping an eye on EBITDA, you’re staying on top of things, so there are no surprises.
What is the Average EBITDA for a Dental Practice?
In 2024, the average EBITDA for a dental practice typically falls between 15% to 20% of total revenue. This means that after covering basic operating expenses, a healthy dental practice should ideally be generating 15-20% of its revenue as profit (before factoring in interest, taxes, depreciation, and amortization).
For example, if your dental practice earns $1 million in revenue annually, a typical EBITDA would be around $150,000 to $200,000. This range is considered healthy and indicates that the practice is well-managed financially.
How does this compare to other industries?
Dental practices typically have a lower EBITDA compared to industries with less overhead, like tech companies, but they tend to perform better than industries with higher operational costs, like manufacturing.
In healthcare, an EBITDA of 15% to 20% is viewed as a good indicator of financial health.
For those looking to sell their practice, it’s important to know that buyers generally seek a minimum of 20% EBITDA for an investment-grade practice. If you’re planning a sale, it’s worth evaluating whether you’re hitting this benchmark.
What is Considered Above Average EBITDA?
If your dental practice has an EBITDA of 25% or higher, you’re in fantastic shape. A practice with that kind of EBITDA is considered highly profitable and would definitely grab the attention of potential buyers, likely bringing in premium offers.
To put it in perspective, if your practice brings in $2 million in revenue and your EBITDA is $500,000, that’s 25%. A practice running at that level is financially solid, probably because you’ve optimized costs, boosted revenue, and maybe even added services like cosmetic dentistry or orthodontics.
But getting to that point doesn’t happen overnight. Practices with above-average EBITDA tend to have well-run operations, strong patient retention, and tight control over expenses like staff salaries, supplies, and lab costs.
What Can You Do if You Find Your EBITDA is Considered Low?
If your EBITDA is below 15%, it might be time to take a closer look at your financials. Don’t worry—there are ways to improve it.
Two key strategies we recommend looking at first are:
Reducing Costs
Take a look at your overhead expenses. Are you spending more on staff, supplies, or lab fees than industry standards?
This is something we see a lot with our clients. For example, we’ve seen dental practices generating over $5 million in revenue but with an EBITDA as low as 10%.
By reviewing expenses like lab fees and supplies, practices can often renegotiate contracts and streamline procurement, potentially saving hundreds of thousands of dollars. These changes can significantly boost EBITDA, sometimes pushing it up to the 25% mark or more.
This demonstrates that even small cost reductions can significantly improve your practice’s profitability.
Increasing Revenue
Look for ways to enhance your practice’s revenue. Could you add new services, expand your marketing efforts, or increase your fees slightly? Often, practices that focus on offering additional high-margin services, like cosmetic procedures or implants, can quickly increase their bottom line.
For example, offering cosmetic dentistry or orthodontics as additional services can increase your revenue without adding significantly to your overhead, pushing your EBITDA higher.
Have More Questions About EBITDA for Dental Practices?
EBITDA helps you get a clear picture of how financially healthy your dental practice is. Most practices in 2024 have an EBITDA between 15% and 20%, but if you’re aiming to be above average, you should shoot for 25% or more.
If your EBITDA is lower than you’d like, don’t worry! There are simple steps you can take to improve it, like cutting costs or finding ways to bring in more revenue. Keeping an eye on your practice’s EBITDA regularly ensures you’re in a good position—whether you’re preparing to sell or just want to stay on top of your numbers.
At Virjee Consulting, we’ve helped dental practice owners for years to keep more dollars in their pockets and make sure their practices are always in a strong position to sell. It’s what we do!
After all, your practice is your most important asset. Keeping it financially healthy is key to making sure you’re always ready for whatever comes next.
If you need more help, we’re always here. Simply use the form below to get in touch with our team and schedule an introductory call.
Until next time!
