The short answer
Adjusted EBITDA is a medical practice’s earnings before interest, tax, depreciation and amortisation, restated to remove costs that exist because of the current owner and would not exist for a buyer. It is the figure a multiple is applied to, which makes it the single most consequential number in a practice sale.
Quick answers
What does EBITDA stand for? Earnings before interest, tax, depreciation and amortisation.
Why is the word “adjusted” there? Because plain EBITDA, before it becomes adjusted EBITDA, still contains costs specific to the current owner, and the adjustments remove them to show what a buyer would earn.
What does “add-back” mean? It is a single adjustment restoring a cost to earnings, on the basis that a new owner would not incur it.
Can an adjustment ever reduce earnings? Yes — an owner paying themselves below market, or renting from their own property entity below market rate, will see earnings adjusted downward.
Who decides which adjusted EBITDA add-backs are accepted? The buyer does, informed by an independent quality of earnings review, and each entry is tested separately.
Does a bigger adjusted EBITDA schedule mean a better outcome? No — a schedule padded with weak entries damages credibility across the whole transaction, including the entries that were legitimate.
When should an owner prepare an adjusted EBITDA schedule? Well before a sale, because the supporting documentation is far easier to assemble as costs are incurred than to reconstruct years later.
Key takeaways
- Adjusted EBITDA restates a practice’s earnings to show what a new owner would earn, removing costs specific to the current owner.
- An add-back must be genuinely non-recurring or genuinely owner-specific; costs that are merely inconvenient do not qualify.
- Adjustments run in both directions, and an owner who has underpaid themselves will see a market salary deducted rather than added.
- Every add-back is tested individually during a quality of earnings review, and unsupported entries are removed.
- Improving adjusted EBITDA and documenting it is within an owner’s control, whereas the multiple applied to it largely is not.
Why adjusted EBITDA matters more than the number owners ask about
Physician-owners almost always ask about the multiple first. It is the number that sounds like a verdict on what they have built. But a practice’s price is the multiple applied to adjusted EBITDA, and of those two figures only one is substantially within the owner’s control. The multiple is set by the market, the buyer, and the practice’s structural characteristics — the factors covered in our guide to how concierge practices are valued. Adjusted EBITDA is set by your records.
There is a second reason to care. Because the multiple operates on this figure, a change to adjusted EBITDA does not move the price by that amount — it moves the price by that amount multiplied. An add-back schedule that is complete, documented and defensible is worth more than a round of negotiation over the multiple, and unlike the multiple, it can be worked on years in advance.
What does EBITDA actually measure?
EBITDA Earnings before interest, tax, depreciation and amortisation. An attempt to describe what a business earns from operating, stripped of decisions belonging to the owner rather than to the business. Adjusted EBITDA EBITDA with owner-specific and non-recurring costs removed, so the figure reflects what the practice would earn under new ownership. Also called normalised or pro-forma EBITDA. Add-back An individual adjustment restoring a cost to earnings, on the basis that a new owner would not incur it.
The four letters after the E each remove a different kind of noise. Interest reflects how the practice was financed, which a buyer will change. Tax reflects the entity structure and the owner’s circumstances, which a buyer will also change. Depreciation and amortisation are non-cash accounting entries reflecting past purchases rather than current operating performance.
Strip those out and you have a rough measure of operating earnings — comparable across practices financed and structured differently. Rough, though, because in an owner-operated practice the reported earnings still contain a great deal that is about the owner rather than the practice. That is what the adjustments address.
What buyers add back to adjusted EBITDA in a concierge practice
Four categories account for most of a typical schedule.
Owner compensation, normalised to market
The largest adjustment in most physician-owned practices, and the one most often misunderstood.
A buyer will need a physician to see those members. So the question is not what the owner pays themselves — it is what it would cost to employ someone to do that clinical work. If the owner takes more than market, the excess is added back. If the owner takes less, a market salary is deducted.
That second direction surprises people, and it is not negotiable. An owner who has drawn a modest salary for years while reinvesting has not created earnings; they have deferred a cost the buyer will have to pay.
Personal expenses run through the practice
Vehicle leases, travel that is not business travel, family members on payroll without an operational role, club and society memberships, personal phone and technology.
These are legitimate add-backs where they are genuinely discretionary and genuinely personal. They also require documentation. “My spouse’s salary” is an assertion; a payroll record alongside an explanation of the role that will not need filling is a supportable adjustment.
One-time and non-recurring costs
A build-out, a software migration, a legal dispute now resolved, a one-off recruitment fee, storm damage. The test is whether the cost would recur under any owner. A dispute that has settled is non-recurring. Legal fees that appear in every year’s accounts are an operating cost, whatever they were for.
Related-party rent, normalised to market
Where the practice rents premises from an entity the physician owns, the rent is set by the owner rather than by the market. Buyers normalise it in both directions: rent above market is added back, and rent below market is deducted.
Below-market related-party rent is worth flagging because it looks like nothing and costs a great deal. An owner charging their practice half the market rate has been inflating reported earnings for years without realising it, and the correction lands during diligence at the worst possible moment.
Worked example
A schedule for a single-physician concierge practice, showing how the two figures diverge.
| Illustrative only — not transaction guidance. All figures invented to demonstrate the arithmetic. They are not benchmarks, not typical values, and not drawn from any transaction. Reported net income | $520,000 |
|---|---|
| Add: interest | $18,000 |
| Add: depreciation and amortisation | $62,000 |
| EBITDA | $600,000 |
| Add: owner compensation above market ($650,000 paid; $320,000 replacement cost) | $330,000 |
| Add: spouse on payroll, no operational role | $48,000 |
| Add: personal vehicle and travel | $22,000 |
| Add: one-time legal dispute, settled | $35,000 |
| Less: rent normalised to market ($96,000 paid to owner’s entity; $144,000 market) | −$48,000 |
| Adjusted EBITDA | $987,000 |
Note the final line. This practice was paying itself below-market rent, which had been inflating reported earnings — so the adjustment runs downward. Note also the gap between EBITDA and adjusted EBITDA: whatever multiple ultimately applies, it applies to the lower figure unless the higher one can be documented.
What buyers refuse to add back to adjusted EBITDA
Sellers overreach here more than anywhere else in a transaction, usually with encouragement. The categories that are routinely rejected:
- Costs that recur under a different label. A “one-time” consulting fee that appears in three consecutive years is an operating cost.
- Undocumented personal expenses. If it cannot be identified in the ledger and explained, it will not survive.
- Optimistic future savings. Efficiencies a buyer might achieve are the buyer’s to claim, not the seller’s to sell.
- Staff the practice actually needs. Adding back an administrator’s salary on the basis that a buyer might absorb the role is a synergy argument, and synergies belong to whoever creates them.
- Deferred maintenance presented as savings. Equipment not replaced is a cost postponed, not a cost avoided.
- Owner compensation removed entirely. Someone has to see the members.
The strategic point is larger than any single entry. A schedule with several unsupportable items does not simply lose those items — it prompts the buyer to re-examine everything else the seller has presented. Credibility is the asset being spent here, and it is not recoverable within a transaction.
How buyers test an adjusted EBITDA schedule
Through a quality of earnings review — an independent accounting analysis commissioned by the buyer, verifying that reported earnings are accurate and sustainable. It is not an audit; it is a targeted test of whether the earnings presented are real, recurring and correctly stated.
Each adjustment is examined individually against source records. In a concierge or DPC practice the reviewer will also reconcile member-level revenue against bank deposits, examine related-party arrangements closely, and look hard at revenue recognition on membership fees collected in advance. The process is covered further in our guide to the concierge practice sale process.
The practical implication is simple. Assume every entry will be tested by someone with no reason to be generous, and build the schedule accordingly.
What an owner can do to protect adjusted EBITDA
More than about most things in a sale, which is why this article exists.
Keep the documentation as costs are incurred. An add-back supported by contemporaneous records is straightforward. The same add-back reconstructed four years later from memory and bank statements is an argument.
Separate personal from practice expenditure now. Not to reduce the add-backs, but to make them clean and identifiable when someone asks.
Know your own replacement cost. If you do not know what employing a physician to cover your clinical work would cost, you cannot assess the largest adjustment in your own schedule — and you will be negotiating on a number the buyer chose.
Address related-party arrangements early. Rent, family payroll, and any service arrangement with an entity you control. These are always found, and disclosing them is materially better than having them discovered.
Have the schedule prepared by an accountant who has defended one before. The skill in an add-back schedule is not identifying adjustments. It is knowing which ones will survive.
Frequently asked questions
What is adjusted EBITDA in a medical practice sale?
Adjusted EBITDA is a practice’s earnings before interest, tax, depreciation and amortisation, restated to remove costs that exist because of the current owner and would not exist for a buyer. It is the figure a valuation multiple is applied to.
What is the difference between EBITDA and adjusted EBITDA?
EBITDA removes financing, tax and non-cash accounting effects from reported earnings. Adjusted EBITDA goes further and removes owner-specific and non-recurring costs — above-market owner compensation, personal expenses, one-time items — so the figure reflects what the practice would earn under new ownership.
What is an add-back?
An add-back is an individual adjustment restoring a cost to earnings on the basis that a new owner would not incur it. Each add-back is tested separately by the buyer, and one that cannot be documented is removed from the schedule.
Can an adjustment reduce a practice’s earnings?
Yes. An owner who pays themselves below the cost of employing a replacement physician will see a market salary deducted rather than added. Rent paid below market to an entity the owner controls is normalised upward to market, which also reduces adjusted EBITDA.
Which add-backs do buyers usually reject?
Costs that recur under a different label, undocumented personal expenses, projected future savings, staff the practice genuinely needs, deferred maintenance presented as savings, and any attempt to remove owner compensation entirely. Unsupportable entries also prompt buyers to re-examine the rest of the schedule.
Who verifies the add-back schedule?
The buyer, usually through an independent quality of earnings review. Each adjustment is examined against source records. In a concierge or DPC practice the reviewer also reconciles member-level revenue to bank deposits and examines related-party arrangements and revenue recognition on fees paid in advance.
Does a larger add-back schedule produce a better price?
Not if the entries cannot be supported. A schedule containing several unsupportable items loses those items and prompts the buyer to re-examine everything else the seller has presented, which is more damaging than the adjustments were worth.
Related reading
Adjusted EBITDA sets the base number. These guides cover the multiple applied to it and the review that tests it.
- What is a concierge medical practice worth?
- What is a quality of earnings review?
- How to sell a concierge medicine practice: the full process
- Who buys concierge medical practices — and what each one wants
