The EBOC margin (Earnings Before Owners Comp, compared to revenue) is 25% for most firms. (The EBOC number normalizes owner comp/perks to eliminate anything above and beyond a management replacement salary, i.e., what a potential Buyer could pay someone to do your job.) This metric is typically the greatest indicator of a Practice’s profitability – because remember, businesses are primarily valued on free cash flow (KPIs then determine the discount factor for the Discounted Cash Flow valuation methodology).
On the other hand, a well-run practice will boast an EBOC margin of 40-50%. That’s a huge jump in profitability compared to 25%! Keep in mind that your EBOC margin can be too high – which means you might not be properly investing in your business.
To increase your EBOC margin, start by looking at the revenue coming in and see if improvements can be made (#5 addresses this). 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.