By Brad MacLiver
Authorship and profile at Google
EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization and is often used to measure the value of some businesses including some in the pharmacy industry. EBITDA can also be used in the comparison of similar companies. Drug store and pharmacy owners in Maine who are considering either buying a pharmacy or selling their drug store should have an understanding of EBITDA and how it affects pharmacy valuations.
Generally, EBITDA makes it easier to evaluate various companies and to compare them against industry averages by removing the non-core and irregular operating costs, such as interest, which can vary depending on the management’s choice of financing, taxes which can fluctuate depending on acquisitions or losses from prior years, and arbitrary factors of depreciation and amortization. Many in the pharmacy industry also use the EBITDA method.
The EBITDA formula can be used as a guideline when valuing larger companies, or when comparing the profitability of large similar companies in the same industry.
For the effective use of EBITDA, these larger companies should possess significant assets, have heavy amortization schedules, or bear substantial amounts of debt. Considering independent pharmacies inMaine
Six easy steps for Maine pharmacy owners wishing to calculate their store's EBITDA:
1. Calculate net income by obtaining total income and subtract total expenses.
2. Determine the total amount of taxes paid to federal, state, and local governments.
3. Compute interest fees paid to companies or individuals for the use of credit, or capital.
4. Establish the cost of depreciation (the expense recorded to allocate a tangible asset's cost over its useful life).
5. Determine the cost of amortization (the expense for consumption of the value of intangible assets, such as goodwill, patents, and copyrights, over a specific period of time, or the asset's expected life.
6. Add #1 through #5.
EBITDA calculation example:
1. Net Income 3,000
2. + Taxes paid 900
3. + Interest Expenses 600
4. + Depreciation 300
5. + Amortization 150
6. = EBITDA 4,950
EBITDA Drawbacks:
1. It can be a misleading number when it is confused with cash flow.
2. It can make even completely unprofitable firms appear financially healthy.
3. The numbers are easily manipulatable.
4. They can overlook cash requirements for growth in accounts receivable.
5. They can miss cash requirements for growth in inventories.
6. They are not factual when valuing small companies.
7. They are ineffective for companies with few assets, small amounts of debt, or low depreciation or amortization schedules.
An example of the drawbacks of EBITDA:
During the 80s, EBITDA was used as a way to look at cash flow during due diligence for an acquisition. This was used to calculate whether or not a company had the ability to service their debt. By factoring out interest, taxes, depreciation, and amortization, they can allow an unprofitable business to appear financially healthy. This method of valuation was used quite often during the dotcom era to value unprofitable businesses with few assets and little earnings. The results from this method caused many to go bust, a blaring example of misapplying EBITDA.
Pharmacy business consultants, who are knowledgeable about performing pharmacy business valuations, will use EBITDA during ME specialty pharmacy valuations, but this is only as part of a larger formula when computing values for specialty pharmacies especially those who have a niche in HIV, disease management, long term care, etc. EBITDA should not be used, however, as part of the usual formula for standard retail pharmacy valuations for acquisitions.
The EBITDA number for a specific existing pharmacy in ME is, for most purposes, important when the existing ownership is establishing their store value for the purposes such as establishing a line of credit, borrowing, creating a Trust, and stock values. EBITDA does not, however, have the same importance when selling aMaine
Buyers may not have the same tax base, interest expense, or depreciation schedule. It is thusly important that the buyer calculate an estimated EBITDA that is specific to their operating model, business systems, buying power, cost of operations, etc., not the sellers. It should also be noted that EBITDA assumes that the buyer will acquire all of the assets, working capital, accounts receivable, and liabilities. Those assumptions do not hold true regarding an acquisition of aMaine
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Authorship and profile at Google
EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization and is often used to measure the value of some businesses including some in the pharmacy industry. EBITDA can also be used in the comparison of similar companies. Drug store and pharmacy owners in Maine who are considering either buying a pharmacy or selling their drug store should have an understanding of EBITDA and how it affects pharmacy valuations.
Generally, EBITDA makes it easier to evaluate various companies and to compare them against industry averages by removing the non-core and irregular operating costs, such as interest, which can vary depending on the management’s choice of financing, taxes which can fluctuate depending on acquisitions or losses from prior years, and arbitrary factors of depreciation and amortization. Many in the pharmacy industry also use the EBITDA method.
The EBITDA formula can be used as a guideline when valuing larger companies, or when comparing the profitability of large similar companies in the same industry.
For the effective use of EBITDA, these larger companies should possess significant assets, have heavy amortization schedules, or bear substantial amounts of debt. Considering independent pharmacies in
Six easy steps for Maine pharmacy owners wishing to calculate their store's EBITDA:
1. Calculate net income by obtaining total income and subtract total expenses.
2. Determine the total amount of taxes paid to federal, state, and local governments.
3. Compute interest fees paid to companies or individuals for the use of credit, or capital.
4. Establish the cost of depreciation (the expense recorded to allocate a tangible asset's cost over its useful life).
5. Determine the cost of amortization (the expense for consumption of the value of intangible assets, such as goodwill, patents, and copyrights, over a specific period of time, or the asset's expected life.
6. Add #1 through #5.
EBITDA calculation example:
1. Net Income 3,000
2. + Taxes paid 900
3. + Interest Expenses 600
4. + Depreciation 300
5. + Amortization 150
6. = EBITDA 4,950
EBITDA Drawbacks:
1. It can be a misleading number when it is confused with cash flow.
2. It can make even completely unprofitable firms appear financially healthy.
3. The numbers are easily manipulatable.
4. They can overlook cash requirements for growth in accounts receivable.
5. They can miss cash requirements for growth in inventories.
6. They are not factual when valuing small companies.
7. They are ineffective for companies with few assets, small amounts of debt, or low depreciation or amortization schedules.
An example of the drawbacks of EBITDA:
During the 80s, EBITDA was used as a way to look at cash flow during due diligence for an acquisition. This was used to calculate whether or not a company had the ability to service their debt. By factoring out interest, taxes, depreciation, and amortization, they can allow an unprofitable business to appear financially healthy. This method of valuation was used quite often during the dotcom era to value unprofitable businesses with few assets and little earnings. The results from this method caused many to go bust, a blaring example of misapplying EBITDA.
Pharmacy business consultants, who are knowledgeable about performing pharmacy business valuations, will use EBITDA during ME specialty pharmacy valuations, but this is only as part of a larger formula when computing values for specialty pharmacies especially those who have a niche in HIV, disease management, long term care, etc. EBITDA should not be used, however, as part of the usual formula for standard retail pharmacy valuations for acquisitions.
The EBITDA number for a specific existing pharmacy in ME is, for most purposes, important when the existing ownership is establishing their store value for the purposes such as establishing a line of credit, borrowing, creating a Trust, and stock values. EBITDA does not, however, have the same importance when selling a
Buyers may not have the same tax base, interest expense, or depreciation schedule. It is thusly important that the buyer calculate an estimated EBITDA that is specific to their operating model, business systems, buying power, cost of operations, etc., not the sellers. It should also be noted that EBITDA assumes that the buyer will acquire all of the assets, working capital, accounts receivable, and liabilities. Those assumptions do not hold true regarding an acquisition of a
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