By Tom Schramski, PhD
Volume 1 Issue 13, July 22, 2014
Recently, we had a chance to review published data on a variety of actual 2014 transaction values for “lower middle market” M+A purchase multiples, including healthcare companies. In plain English, this means the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) of various companies multiplied by a number to achieve the actual selling price. According to numerous external market sources like Axial, Pitchbook, and GF Data, their average multiple of EBITDA ranged from 6.5x to 11x. That’s quite a range and there is excitement because these are the highest multiples of the past decade.
This issue is a significant one for tens of thousands of healthcare businesses who are planning to sell their businesses in the next five to ten years, especially Baby Boomers. It’s also critical information for financial buyers (like PE firms) and strategic acquirers (like large healthcare segment companies), who are trying to plan and invest for the future. Their shareholders are depending on them and their relative success impacts thousands of other people.
The problem with this recent data, as well as that provided by other M+A and analytics firms, is as follows:
The fact is that the vast majority of lower middle market (and below) transactions are never recorded in any database. While this is understandable from a privacy perspective, it helps to observe the market values that would be useful to sellers and buyers. One of the larger 2013 healthcare acquisition reports by Irving Levin Associates lists several hundred transactions, but very few yield any relevant information like price/revenue or price/unit. It’s confidential.
There is a lower middle market alternative to the post-hoc approach that relies on the EBITDA multiples of large companies of $250 million or more revenue at transaction. While it is always useful to know about a sales value, it may be more helpful to know what the values are for companies prior to selling and how to maximize value in a way that is attractive to potential buyers. In essence, the past can be instructive, but how do I best build value in my $10 million health organization or my $15 million DME?
We’re going to focus more in this area in the coming months with the goal of creating a more compelling, data-driven view of the healthcare marketplace that will be of strategic value to sellers and buyers alike.
Tom was the Founder and Managing Partner of VERTESS. He was a Certified Merger & Acquisition Advisor (CM&AA), consultant, and Licensed Psychologist with over 35 years of very successful national experience in the healthcare marketplace, including co-founding and building a $25 million behavioral health/disabilities services company. Tom represented sellers and investors across the healthcare spectrum and was recognized for his executive leadership in the 2005 Entrepreneur of the Year issue of Inc. Tom passed away in December 2018.