EBOC (Earnings Before Owners Compensation) normalizes owner comp/perks to eliminate anything above and beyond a reasonable management replacement salary. The EBOC ratio metric (as a percentage of revenue) is typically the greatest indicator of a Practice’s profitability – because businesses are primarily valued on free cash flow.
A well-run practice will boast an EBOC margin of 40-50%.
To increase your EBOC margin, start by looking at the revenue coming in and see if improvements can be made. Next, take a hard look at your expenses. It’s easy to fall into the pattern of paying a bill year after year without questioning it. Chances are you can trim expenses somewhere. But keep it realistic; cutting necessary and reasonable expenses isn’t going to positively affect your true bottom line. And don’t make the mistake of taking a K1 distribution in lieu of a salary to show a higher number either (because you’ll end up subtracting a management replacement salary from your cash flow anyway to normalize expenses). With incremental changes over time, you can improve the financial snapshot of your Practice. Keep in mind that your EBOC margin can also be too high – which means you might not be properly investing in your business.