What is pro forma EBITDA in a practice valuation?
Pro forma EBITDA is the calculation of what EBITDA would look like if a known change had been in effect for the full period, used to bridge historical results with a forward-looking run rate.
Quick answer
Pro forma EBITDA adjusts historical earnings for known future changes like new providers hired mid-year, fee schedule increases in effect, or a recently-opened location running below capacity, typically reflecting a full year of annualized performance.
The detail
Pro forma adjustments can be legitimate or aggressive. Legitimate examples: a new associate who started in month 8 whose annualized contribution is already proven, a fee schedule increase signed and active by year-end, a second location that opened in Q3 and is tracking to plan, closure of an unprofitable service line already completed. Aggressive examples: pro forma contribution from providers who have not yet signed employment contracts, run-rate from new services that are untested, expected cost reductions from operational changes that have not been implemented. Buyers scrutinize pro forma adjustments heavily because they directly lift the purchase price. A credible pro forma EBITDA needs evidence: signed contracts, completed hiring, 3 to 6 months of actual post-change performance. Sellers who present pro forma EBITDA without supporting documentation usually see the buyer strip it out in diligence and chip the price to compensate.
Buyer-side QoE reports typically disallow 30 to 50 percent of seller-claimed pro forma adjustments unless supported by documented contracts and at least 3 months of actuals.
Source: AICPA M&A Practice Guidance
Pro forma EBITDA commonly represents 10 to 25 percent uplift over reported trailing EBITDA in growing healthcare practices.
Source: Pitchbook Healthcare Services
What this means for clinic owners
From Sorso
Pro forma is where seller credibility is won or lost. Overclaim by 20 percent and the buyer assumes every other number in your deck is inflated. Underclaim by 20 percent and you leave real money on the table. Work through the adjustments with a finance advisor who has seen what holds up under QoE, not just what the broker's pitch deck says.
Related questions
How do PE firms value medical practices?
Private equity firms value medical practices primarily on a multiple of trailing twelve-month adjusted EBITDA, typically 5x to 12x, with the multiple driven by scale, growth, payer mix, and provider retention.
What are EBITDA add-backs in practice valuation?
EBITDA add-backs are non-recurring or owner-related expenses added back to reported EBITDA to show normalized earnings, typically increasing reported EBITDA by 10 to 30 percent in owner-operated practices.
What is a quality of earnings report?
A quality of earnings (QoE) report is a buyer-commissioned financial due diligence analysis that normalizes EBITDA, tests the reliability of revenue and expenses, and identifies risks that affect purchase price, typically costing $50K to $150K for a healthcare practice.
What is an LOI in healthcare M&A?
A letter of intent (LOI) in healthcare M&A is a non-binding agreement that sets the proposed purchase price, structure, exclusivity period, and diligence timeline before a buyer commits the resources to close a deal.
Founder of Sorso. 19 years in corporate finance. Managed a $450M loan portfolio before building a fractional CFO firm exclusively for healthcare clinics.
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