How Adjustments In Owner Compensation Impact the Value of Your Pediatric Practice
If you’re a pediatrician considering selling your practice — now or in the future — it’s critical to understand how third-party buyers determine its value. One of the most widely used methods is based on EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Below are specialized EBITDA Calculator and a Sample Excel Worksheet to help pediatricians better understand how a practice valuation based on a multiple of EBITDA works — and, most importantly, how adjustments to your future compensation and benefits can significantly impact that valuation.
What the EBITDA Calculator Does
The calculators guide the process of converting your practice’s current financials into a normalized EBITDA — the baseline figure third-party buyers use when estimating what a practice is worth.
Here’s what it includes:
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Net Income Starting Point: The calculation starts with your practice’s reported net income.
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Standard Add-Backs: It adds back non-cash items like depreciation and amortization, as well as any interest and taxes.
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Owner-Specific Adjustments: This is where things get tailored for pediatric practices, particularly around the owner’s salary, retirement contributions, health insurance premiums, automobile expenses, or any personal costs run through the practice.
Why “Go-Forward” Salary & Benefits Matter
In most pediatric practices, the owner(s) are the highest-paid providers and often receive a compensation package that reflects both clinical work and compensation for being the owner of a business. However, a potential buyer will evaluate the future compensation assuming a more standardized cost to transition a former owner to being an employed pediatrician.
To illustrate, if the owner of a practice made $225k last year, one can reasonably assume that the first $175k was for their work as a pediatrician providing care to children. The variance of $50k ($225-175k) is the "benefit of owning the practice". For a practice with only one provider, in this example, the EBITDA would closely mirror the $50k "benefit of owning the practice".
When expanded, a five-provider practice where a single owner is making $50,000 off of each of the four employed providers, the initially calculated EBITDA would be close to $200k (4 employed providers X $50,000).
PMI's spreadsheet and online calculator below allows one to enter many variables to help pediatricians properly assess the practice EBITDA:
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Current salary and benefits for the owner (s)
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Expected changes in future revenue and expenses
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A market-rate “go-forward” salary and benefits, reflecting what it would cost to pay the owner to stay on board as a pediatrician seeing patients (or hire a replacement provider).
How This Affects Practice Valuation
EBITDA is typically multiplied by a market valuation multiple (often between 3x and 6x in pediatric practice acquisitions) to determine the sale price of a practice. So, every $1 of reasonably increased EBITDA from reduced owner compensation could, in theory, increase the practice valuation by $3 to $6.
Example for Pediatricians:
Assuming a pediatrician currently earns $ 350,000 in salary and total benefits, but expects his/her future salary and benefits to total $ 250,000 after selling his/her practice, the $100,000 difference increases the adjusted EBITDA by $100,000.
If a pediatric practice is valued at 5x EBITDA, that adjustment alone could add $500,000 to the calculated practice value.
A Tool Designed with You in Mind
The calculator and spreadsheet below were built to reflect the unique financial structure of medical practices. These complimentary resources help translate complex financial adjustments into understandable insights and provide a clearer picture of the impact as various items are adjusted.
Whether you're years away from selling or actively preparing, understanding how “owner compensation normalization” works is a powerful first step toward maximizing your practice’s value.
