Earnings Before Amortization
While depreciation reflects the lost value of tangible assets, amortization reflects the lost value of intangible assets. Let’s assume that a business with 750K worth of tangible assets was purchased for 1M dollars. 750K of that 1 million would be depreciated according to an IRS schedule. The left over 250K was presumably for what we call ‘good will’ or ‘blue sky’; it was money spent on an intangible part of the business that we believe had worth (in this case 250K of worth). As with tangible assets, the IRS diminishes our tax responsibility to Blue Sky over time in the form of amortization. It is the recorded loss of value of an intangible asset.Many consolidated buying groups have a ‘rule of thumb’ offer practice based on an business’s EBITDA. Typically this is a 4.5-5.5 multiple (though as of 2015, there are buying groups promising eye popping multiples of 7-12 times EBITDA). For example, if a business is showing 300k of EBITDA, a buying group or corporation might offer the business a range of 1.35m-1.65m for their business. But it’s extremely important to remember that no business is entitled to any amount of money. These concepts are just jumping off points for a discussion on the sale of a veterinary practice. Every buyer’s expressed interest in a business will be followed by ‘due diligence’ during which time, the buyer will assure him or herself that past performance is indicative of future earnings.
Earnings Before Depreciation
Earnings Before Interest
Earnings Before Taxes
Use these Veterinary Business Valuation Tools and Pricing Definition of Terms and Formulas to assist you with selling your business Business Valuation TermsEBITDA: Stands for Earnings before Interest, Taxes, Depreciation and Amortization Depreciation: An...read more