Part 5 of Valuation Basics – Everything Else in the P&L to Consider

by | Oct 19, 2020

We are almost to the end, and next week, I will provide an Excel based presentation to pull together everything. In the meantime, below are the P&L expenses to evaluate with valuation implications.

Apply valuation adjustments to eliminate the following expenses and add-back to your valuation EBITDA…

  • Owners Family Health Insurance
  • Owners Life Insurance
  • Owners Disability Insurance
  • Owners’ other personal expenses (Auto, Auto Ins., Cell Phone)
  • Legal
  • Accounting
  • Business Consulting
  • VMG and others that will not continue with consolidators
  • Charitable Contributions
  • Interest Expense
  • Depreciation
  • Amortization

Practice valuation adjustments that are not as straightforward…

  • Retirement/401K/Safe Harbor Contributions – it is subjective and it depends on the consolidator, but I would start with applying a valuation adjustment to eliminate owners portion of expenses & add-back to your valuation EBITDA.
  • Health Insurance (HI) – in general, if you currently do not provide HI, I would consider adding 1.5% to 2% of revenue as a HI placeholder increasing your expenses and lowering your valuation EBITDA. This is subjective and it will depend on the consolidator. But in my opinion, this is an ongoing cost that should be reflected in a practice valuation.
  • Continuing Education (CE) – typical consolidator assumption will be $2K is needed in the P&L per doctor for CE. Again, this is subjective.
  • Advertising & Promotions – this is tough because the consolidators are all over the map. High-level, this would be my approach. If there is at least 1% of revenue for Advertising & Promotions, I would leave as is. If there are zero expenses, I would add 1%, increasing your expenses and lowering your valuation EBITDA. If you have 2%, but the bulk is made of Yellow Pages expenses, I would adjust to eliminate those expenses and add-back to your valuation EBITDA. If you have 2%, but they are from social media expenses, I would leave the 2% in your P&L and make no adjustments.
  • Other Income (interest, misc., gain/loss) – apply a valuation adjustment to eliminate the income & lower your valuation EBITDA.

Final Thoughts

I realize that this form (articles) is not the ideal way to discuss valuation basics. Next week (Tuesday), as I will wrap up and conclude the valuation basics series, I will add a bonus Excel based presentation to visually map out the adjustments, add-backs, and concepts and pull together everything we have discussed in the series.