What is EBITDA? And why are people talking about it? Casey and Jarrod break it down and explain how it's important but not the most important thing to keep track of in your practice.
Announcer:
Hello, everyone. Welcome to The Millionaire Dentist podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry, finances, and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue, and may not be safe for work.
Casey Hiers:
Hello and welcome. This is Casey Hiers, back at The Millionaire Dentist Podcast, in-studio with co-host Jarrod Bridgeman. How are you, sir?
Jarrod Bridgeman:
Good. How are you?
Casey Hiers:
Fresh off a trip from Mammoth? Where'd you go?
Jarrod Bridgeman:
Down to Kentucky for Mammoth Cave and Kentucky Kingdom with the kids.
Casey Hiers:
Nice. One with nature and then rode some rides?
Jarrod Bridgeman:
Yeah.
Casey Hiers:
That sounds like fun.
Jarrod Bridgeman:
I've never been to caves before and they were huge. And those cool just to see writings on the wall from like 1841 and stuff like that.
Casey Hiers:
Oh, wow. The rides didn't make you sick, did it?
Jarrod Bridgeman:
I may have gotten a little crazy on the teacups. My kids... I think that's like a dad thing to do.
Casey Hiers:
Right.
Jarrod Bridgeman:
Yeah. Love it.
Casey Hiers:
So I hope there's some listeners out there that remember Seinfeld. I'm getting older, Jarrod, and when I reference Seinfeld, I get a lot of blank looks from the younger generation, which makes me sad because I love Seinfeld and it reminds me that I'm getting older.
Jarrod Bridgeman:
Yeah.
Casey Hiers:
So they would always say, "What's the deal with...?" Fill in the blank. So today we're going to start with, what's the deal with EBITDA.
Jarrod Bridgeman:
EBITDA?
Casey Hiers:
You heard of that?
Jarrod Bridgeman:
No. Is that like a college?
Casey Hiers:
You've heard it a little bit around here, right? I think. Earnings before interest taxes, depreciation, and amortization.
Jarrod Bridgeman:
See, that makes sense. I heard the term, never wanted to ask because I wanted to not look stupid.
Casey Hiers:
There you go.
Jarrod Bridgeman:
So, yeah.
Casey Hiers:
There's probably one or two people out there that can relate, right? This acronym, it's financial term, it's an accounting term. It's something we're hearing more and more in dentistry. And so I thought, let's talk about EBITDA.
Jarrod Bridgeman:
Okay, great. So you have explained kind of what it is. Why is this term coming up in the dental industry? What is the purpose behind it?
Casey Hiers:
Been hearing it more and more and it's interesting, right? NBA players want to be rappers. Rappers want to be NBA players, right? It's sometimes I find that dentists and specialists and practice owners, they want to be Wall Street czars or, or financial people. It's an interesting dynamic. I'm hearing EBITDA more and more. The source is typically corporate dentistry or the SO's, right? This is a way that they can measure profitability and it's a way to assess value to a practice. And so, probably the best way to dive into this, what I've heard the most is it seems like people out there, dentists, some of them went to dental school with their brothers, uncles, best friends, third cousin who-
Jarrod Bridgeman:
Oh, Carl. Yeah.
Casey Hiers:
Yeah, yeah, Carl. He had a handful of practices, EBITDA was good, got a big check. Carl doesn't work anymore. And so everybody that Carl talks to he's using the word EBITDA.
Jarrod Bridgeman:
Of course, he's preaching that. It worked for him.
Casey Hiers:
And, a million dollars, right? Multi multi-million dollars. Anything can work, sometimes. What I'm hearing is, so many practice owners just focusing on EBITDA and they think that they've got to get multiples, multiples, multiples. Four X, five X, six X, seven X. "If I can just do that, everything's great." That can happen. That can occur. Absolutely. That's also getting a lot of people in trouble.
Jarrod Bridgeman:
So, basically what you're saying is a lot of these people seem to think they need to own multiple practices, which in my mind, in other topics we've discussed before on this podcast, that seems like an incredibly stressful venture to go on because not only do you have to buy and then maintain them, but then make all 6, 7, 8, 9, whatever you have, profitable or EBITDA, right? So I mean, right away, what's the biggest stressor people tend to get from having multiple practices?
Casey Hiers:
I like how you just made EBITDA a verb.
Jarrod Bridgeman:
No, I...
Casey Hiers:
You touched on an important point. A lot of practice owners, one of their top stressors is their staff, the HR, their team, right? Those aspects. When people see that EBITDA number, they think, "Okay, four X, five X, that's more money in my pocket." And so they instantly just think, "Let's scale it, let's grow it, let's acquire more."
Jarrod Bridgeman:
Well, and right now that sounds even, I would say harder or worse than in previous years because from what I'm hearing, people are having a really hard time getting staff in general.
Casey Hiers:
Very astute point, right? And so, if you take one of your biggest stressors and multiply that by two X, three X, five X, six X, that point is getting underscored. It's almost like everybody's focusing on this EBITDA, this number, scaling it, multiples. Well, what's that take, right? What's that actually going to take? What's that look like? And for a lot of practice owners, one or two practices is a handful and it's very challenging. And so, one of the things we'll talk about today is, consider what that looks like. Ultimately what most people want is more money. They want more profitability. They want more security. They want financial freedom.
Jarrod Bridgeman:
And they're putting all their hopes into this one basket of, "Well, if I do this, then I'm guaranteed that they're going to want to come and buy my practice." Even though you could maybe have five successful practices, but you're in a really crappy part of town. I don't know what the other factors would be. But there's a chance that's not going to happen.
Casey Hiers:
My dad was big on analogies. Here's one for you.
Jarrod Bridgeman:
Okay.
Casey Hiers:
I was in Southern Nevada, presenting some CE, and here's the analogy of multiple practices. I'm playing blackjack, right? A little bit of blackjack. Ended up winning. It was a miracle. But I played one hand. Playing one hand can be hard enough, $25 table. I like a $10 table, right? $25 table, I'm playing one hand, that's stressful enough. I look over, there's a guy playing his hand, three hands to the right of him and two hands to the left of him. That's six hands of blackjack on each deal.
Jarrod Bridgeman:
To keep track of.
Casey Hiers:
Think about that. That can be amazing. It can be terrible. Or you can kind of break-even and it's where you were to begin with.
Jarrod Bridgeman:
Yeah.
Casey Hiers:
When we were thinking about this, I was thinking about that guy playing six hands of blackjack by himself and the practice owner that wants six practices with great profitability to get this magic wand check.
Jarrod Bridgeman:
That's crazy to me because even then, yeah, blackjack is stressful even at $5 tables. That's what I do. But, if you only have very few cards, we're not talking about potentially a dozen people at each practice.
Casey Hiers:
Or variables.
Jarrod Bridgeman:
Yeah.
Casey Hiers:
There's more variables. And so, ultimately when I have conversations with these practice owners, I ask them what's important to them, why... It comes from DSOs? It comes from these stories of making a lot of money. And so I ask them, "If you can have one practice, maybe two, and if you can have an incredible income and have an incredible retirement savings and have $14.35 million...," As one of our clients who was just in here is going to have, "...which one would you pick?" And ultimately they look and say, "Well, of course, I'd like my life to be simpler." But they're not sure if they can get there by themselves or what options that they have.
Jarrod Bridgeman:
So, is it the DSOs in the corporate dentistry places that are throwing around the acronym EBITDA or...
Casey Hiers:
Good question. So, from what I understand, right? This term, this acronym, it first came to prominence in the mid-eighties.
Jarrod Bridgeman:
Okay. So did I.
Casey Hiers:
And it wasn't dental, right? It was in the mid-eighties and as leveraged buyout investors examined distressed companies that needed financial restructuring, this was a way to quickly calculate a risk and if it would be profitable for them. And so that's where this term came from.
Jarrod Bridgeman:
See, I find that interesting because we're talking about the DSOs, corporate. And so it sounds like it hit in the mid-eighties when corporations are really, really taking off. And I mean, I was born in '83, but my understanding a lot of, maybe it's the movies that I've watched-
Casey Hiers:
Are you thinking about Michael Douglas?
Jarrod Bridgeman:
I am. I'm thinking about corporate greed, that greed is good.
Casey Hiers:
Charlie Sheen.
Jarrod Bridgeman:
Gecko, wasn't that his name?
Casey Hiers:
Gordon Gecko, yeah, yeah. But yeah, that's where this term came from. It's been around for a while. It's got into dentistry more as corporate dentistry and DSOs have come to prominence. That's the term, that's the measure of profitability. Now, it can be a little misleading because many times it strips out the cost of capital and investments. There's some holes in it. Another drawback, actually, it doesn't fall under GAAP. G-A-A-P. There's another acronym, generally accepted accounting principles. EBITDA does not fall under that as a measure for financial performance, not the end of the world. Good for our listeners to know, good to be aware of.
Jarrod Bridgeman:
I don't think I've actually heard one of our accountants say it.
Casey Hiers:
We measure it. We know what our clients' EBITDA is, we just don't pound our chest and scream EBITDA from the rooftop. Instead, we want the overhead low, the income high. We're looking at a kind of a different metric because here's the deal. If you get your six X and your EBITDA is wonderful and you get that check, you're going out on somebody else's terms. You're an employee now. You're not the owner.
Jarrod Bridgeman:
Yeah.
Casey Hiers:
That can be tough. You're running the show. You have worked really hard to get your EBITDA where you need it to be. I almost say this word with disdain because I hear it so often I just kind of chuckle, right? Who doesn't want to be profitable? But yeah, you've worked really hard to get to that point. And then, you're now going to ultimately be an employee and your staff is going to be in a corporate environment that doesn't have that family feel-
Jarrod Bridgeman:
They tell you how much you get paid. They tell you when you can take vacations.
Casey Hiers:
Well, they're certainly monitoring production. They're certainly monitoring production. I mean, did they call you at lunch to check on you using their software to see if you've produced enough? Ah, I don't want to go there, but you are an employee. So again, what's the deal with it EBITDA, it is a measure of profitability. It's good to be aware of. But as a practice owner, ask yourself, what do you really want? Do you want more money? Do you want financial freedom? Do you want a good retirement? Do you want a good net worth? Do you want the confidence of knowing that you can get that with one good practice? You can get that with two good practices. But when I hear these people talking multiples, I mean, it's not easy.
Jarrod Bridgeman:
So from my understanding, it is a thing you should probably keep track of.
Casey Hiers:
Of course. Well, your accounting team should absolutely have those numbers and know what they are, and yeah.
Jarrod Bridgeman:
Now, is there a downside? I mean, you said that you kind of say it with some disdain. Is there a downside if that's your main focus? If that's what you're really...?
Casey Hiers:
That's a great question. This comes down to, what does each person want? You have to decide what you want. Some people I talked to, they want their name in lights. They want to be known in their city for having five or six practices, that's their passion. Then you should do that. Have that plan laid out, achieve that plan. There's multiple ways to success. I feel like more people go down that path because they think they should, they don't know another path.
Casey Hiers:
And so, there's a lot of people out there that say, "I like my single practice with four to six chairs and nine staff. And I like that. Can I keep my life simple and still achieve my goals?" The answer is most likely, yes. The key to this is determining what you want. And too many practice owners just feel like they have to do this, right? "I have to go down this path. I don't know what else to do. I need to go buy a bunch of real estate. I don't know what else to do." Real estate's not bad, our topic today is not bad. But ask yourself, what do you want? Jarrod, I think that's probably a good place to leave it.
Jarrod Bridgeman:
Thanks. You know what? This is a really interesting topic and I think a lot of people are going to learn from that one.
Casey Hiers:
If I see you come in here with like an EBITDA University custom-made shirt, I might laugh.
Jarrod Bridgeman:
Oh my gosh. That is brilliant.
Casey Hiers:
New marketing idea. Thanks, bud.
Jarrod Bridgeman:
Thanks.
Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice go on over to FourQuadrantsAdvisory.com and see why year after year, they retain over 95% of their clients. Thank you again for joining us, and we'll see you next time.
