By Tom Schramski, PhD
Volume 1 Issue 14, August 5, 2014
As we discussed in our last issue, much of the middle market valuation multiple data reported in financial publications is suspect for a variety of reasons, especially as it relates to healthcare companies. Your responses in the past two weeks challenged the assumptions of recent reports on rising multiples with very specific examples. Your questions raised another basic one:
What is being multiplied to create a valuation estimate at transaction or otherwise?
Here are four considerations to keep in mind when reading about multiples:
The elusive character of EBITDA multiples points to a fact that most of us ultimately know: it’s not the EBITDA or multiple per se that drives value, it’s what’s underneath the hood of the business and what the seller is trying to accomplish. Sophisticated buyers approach a potential acquisition the same way and are trying to predict how an acquisition makes sense from a similar perspective given their existing operations and their investment objectives.
As a seller, if you know your goal and build the value to correspond, the multiple of EBITDA issue will reflect it. There will be more on that in our next issue.
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.