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EBITDA – How Procurement Best Practices Can Boost the Valuation of Your Dental Practice and DSO

August 30, 2021

With improved procurement processes and best practices comes lowered costs and improved efficiencies, which ultimately increase the valuation of your dental organization.

Let us explain.

EBITDA is a business metric that gauges a business’s operating performance and is widely used by prospective buyers in evaluating your dental practice or DSO. The acronym stands for:

E= Earnings
B= Before
I= Interest
T= Taxes
D= Depreciation and…
A= Amortization

 

Why Does EBITDA Matter?Calculating EBITDA

EBITDA removes fluctuating factors (such as taxes which may vary from period to period or depending on conditions) and non-cash expenses (like depreciation). Because of this, it is often used by investors, shareholders, and analysts for evaluating a company’s performance before the impact of accounting and financial deductions thus enabling an “apples to apples” comparison.

Essentially, if you’re looking to appeal to buyers, your EBITDA matters as boosting your EBITDA boosts your valuation. So, how can you improve your EBITDA, and thereby improve your valuation?

Let’s start with how you calculate it.

How to Calculate Your Dental Practice’s EBITDA

It’s simple really. Go to your income statement and balance sheet to find all the numbers you need. Take your total revenue, subtract all of your operating expenses but not your depreciation, amortization, interest, or taxes, and you’ve got your EBITDA.

However, let us take a minute to point out that although EBITDA is an important metric you want to be monitoring, and improving, it is only one tool and is not meant to be the sole measure of a dental practice’s performance or value. Yes, EBITDA can help determine the profitability of your dental operation and allows for easier comparison to other dental practices or DSOs, a valuable tool for possible investors when deciding if your dental practice is worth investing in.

But, it’s important to note that two dental practices or DSOs may be equal in EBITDA, yet one may be more profitable due to debt expenditures or tax structure. EBITDA is but a starting point. Other factors are then considered to gain a better understanding of the impact of things such as debt, capital expenditures, and taxes on the overall enterprise value of your practice. Nonetheless, it’s a very important metric you should be keeping your eye on.

Recognizing the importance of EBITDA, begs the question “How do I increase the EBITDA of a dental practice or DSO”? Improving the procurement process in your dental practice or DSO is a powerful and often underutilized path.

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    Boosting the Valuation of Your Dental Practice or DSO Through Better Procurement

    Did you catch the “subtract all your operating expenses” we mentioned above? The lower your expenses are, the less you subtract and the higher your EBITDA. Strategic procurement that leverages your purchasing power, is grounded in best practices, and powered by digitization drives efficiency and lowers the cost of doing business.
    As we mentioned in Effective Dental Procurement; The Impact of Buying Smart, many dental organizations tend to focus on increasing revenue to improve profits, while overlooking the fact that lowering expenses (including labor costs) has a much greater impact on profitability and EBITDA. How much greater?

    According to Supply Chain Dive, “A substantial increase in EBITDA can be associated with cutting supplier costs, with a 10% reduction generating a 32% surge in EBITDA”. Based on the industry averages for a dental practice or DSO, every dollar you save in procurement equates to nearly three dollars ($2.94) in additional production.

    Dental practices and DSOs are commonly sold for a multiple of EBITDA that ranges from 4 times EBITDA, to (in some rare cases) 15 times EBITDA or more. Based on today’s dental practice and DSO valuation multiples, every $1 saved on procurement can add $5 – $15 to your practice’s value.

    ROIUse our handy calculator to determine the impact procurement savings can have on your practice.

     

    This is why a well-developed Procure-to-Pay (P2P) process (the process that begins with the knowledge that you require a good or service to the payment of the invoice), ensures you have what you need when you need it, and is the backbone of organizational health and improved profitability.

    The Best Practices of Dental Procurement

    Best practices are, well, best for your business. These standards were created in order to close loopholes and ensure you are following the basic processes that are good for your dental practice’s P&L. Let’s take a look at a few of the fundamentals that drive better financial results.

    How to Prevent Dental Supply Price Creep Through Quotes and the 3-Way Match

    Price creep is the erosion of the hard fought discounts you have negotiated through your suppliers. Price creep typically takes the form of small increases, often without notification to the dental practice or DSO, that are likely to go unnoticed. However, they are implemented regularly enough that when gone unchecked, they can end up making a significant difference to your bottom line.

    These seemingly small discrepancies can quickly add up to some significant losses.

    Recognizing this risk, many practices have implemented their own system to try and catch these increases. Some practices track every dental supply purchase on an excel spreadsheet while others compare prices with multiple suppliers on every order. Technology available today (like Method) supports the principles underlying these time intensive legacy processes, in a simplified and more efficient way.

    If a dental supplier quotes your practice on a product, a set of products, or all your products, procurement software (like Method) will store those prices and quote expiration dates. When a purchase order is created the quoted price will appear on the purchase order until the expiration date of the quote. If the supplier does not honor the quoted price, the 3-way match process will identify the discrepancy and the invoice will not be paid until an off-setting credit is issued.

    Inventory Management, Protecting Your DollarsInventory Management for Dentists

    Good inventory management is the framework you need to get it “just right.” Keeping enough inventory on hand for production requirements while avoiding the hefty costs and repercussions of carrying too much stock, such as impeded cash flow and assuming financial losses from expired inventory. It is the framework that allows for streamlining and improving the procurement processes that lower your cost of supplies and improve your profits—making them every bit worth doing.

    Lessen Frustrations. Improve Efficiencies.

    In most dental practices and DSOs, the office staff responsible for purchasing supplies and services have a host of other responsibilities demanding their attention. Procurement is typically rushed and often frustrating. A lack of an established process combined with high usage volumes and a long list of supplies can be cumbersome and overwhelming to deal with.

    Poor inventory processes frustrate employees as they fail to locate supplies or know what needs to be purchased, wasting both time and money. Reliable inventory control alleviates these pain points while also affording you more accurate financial reporting.

    Additionally, streamlining your procurement processes frees up your employees for other tasks. In contrast, standards-based procedures make it easier for new employees to be trained in procurement while ensuring all valuable information is retained and easily accessible, regardless of turnover.

    Price Shopping

    It sounds simple. However, when it comes to dental supplies, without the right platform, it’s difficult to garner visibility on market pricing so you can make the best buying decisions. Asking for quotes, tracking, and comparing responses is extremely time-consuming when it’s a manual process. Digitizing procurement makes all of the difference.

    That’s why Method scours the internet, bringing you all the data you need to your fingertips. Much like shopping on Amazon, you can simply shop for what you need and buy at the best possible price. Even if you go no further, this one step can bring you significant savings.

    Of course, we also provide you with robust data and analytics, empowering you to leverage your spend, create a sourcing strategy and negotiate even stronger pricing.

    The Advantages of Going Digital

    Digitizing the procurement process allows you to streamline processes, build efficiencies, enable collaboration amongst geographically dispersed teams while gaining insights and control of an essential business function. Simply put, digital methods uncomplicate the complicated, leaving less room for error and more time for you to focus on making strategic cost-saving procurement decisions. In the end, it’s really about being smart with your money, and that’s just smart business.

    Integrate Your Entire Dental Procurement Process

    From its inception, we developed the Method platform specifically for dental practices. Method integrates the most critical components of procurement best practices into a workflow that simplifies life for your team. Every action inside of Method’s platform has been thoughtfully designed to control your spend and drive results to your bottom line. From digital inventory management to easy price comparison, and streamlined ordering Method takes the guesswork out of procurement. Learn how we can improve your practice with our proven procurement process today.