Sir, My understanding of practice valuations is that they are frequently based upon multiples of earnings before interest, tax, depreciation and amortisation (EBITDA). However, a recent NASDAL report on practice goodwill values1 has caused me to question whether EBITDA is an accurate measure of goodwill values where the business holds a contract which offers commissioner/'employer' pension contributions?

It strikes me that for contracts which are delivered in part or fully by the contract holder and where the 'employer (commissioner) contribution represents a substantial percentage of the total nett income which forms the basis for the contract holder's pension calculation, then EBTIDA and the coarser Percentage of Gross Fee Income basis?2

Based upon very rudimentary calculations of my own, if the 'employer's' pension contribution is 20%, if the pensionable pay approximately equals EBITDA, if the business owner delivers all of the contracted activity and if the EBITDA figure is approximately 45% of gross earnings, then the multiple used for calculating an EBITDA based valuation of the business should be 1.2 (pension value multiplier - PVM). It is also worth noting that the PVM could be larger still where the pension has benefits which enhance its market value.

In the case of larger contracts the PVM-corrected EBITDA value (PVMC-EBITDA) would only take into account the 'employer's' contribution typically delivered by the contract holder for a given size of contract. Therefore, with increasing contract size, the PVM would reduce and where the contract was held by a body corporate or (pension scheme) opted out contract holder, the value would be2.

I would welcome a critical analysis of the above reasoning by those with a through working knowledge of this area of the business of dentistry.

Paul V Mc Crory, via email.