How Do You Value a Healthcare Business
A valuation multiple is a financial ratio used to compare the value of a company to a relevant metric, such as earnings or revenue. The multiple is used to determine the relative value of a company, and can be used to compare companies within the same industry or sector.
There are several types of valuation multiples, however, The vast majority of small business are valued and end up being sold for a multiple of their EBITDA. EBITDA is Earnings Before Interest, Taxation, Depreciation and Amortization. The majority of healthcare companies are valued this way as well, although there are a handful of scenarios where patents or other intellectual property will be factored into the companies value.
What Are The Multiples Used in Valuing Healthcare Companies
Unfortunately, there is no short answer to this. The valuation of a life science company with proprietary IP and patents is much higher than that of a small hoe service company. As a general rule of thumb:
- Healthcare businesses doing less than $1m in annual adjusted profit (Adj. EBITDA) will sell for 2.5 – 4 X of that figure.
- Companies with $1m – $3m Adj. EBITDA will sell for 3.5 – 6 X that figure
- Over $3m in profit will likely get you a valuation from 5 – 8X.
Note that these ranges are just a guideline. As mentioned above, there are a number of criteria that will make your business worth more or less. We’ll dive into these a bit more later in the interview.
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Annual Growth
Average growth for the past 3 years
Client Base
Do you have recurring customers that makeup the majority of your business?
Over 20% of my business is long-term contracts
Over 75% of my business is long-term client contracts
Management Team
Do you have a tenured management team in place
The new owner will have to hire and train a management team
A portion of my business is run my managers.
My business is entirely run by my managers.
Healthcare Vertical
Which of the below most closely represents your business
Describe your business product/service
When is a Revenue Multiple Used for Healthcare Companies
Revenue multiples are not typically utilized by investment bankers or private equity companies when coming up with an appropriate value for healthcare businesses. This is primarily due to the fact that healthcare is a sector that does not see parabolic growth the way some tech companies and software companies can. When a company is growing rapidly and all of their cash is being reinvested back into marketing, this is a scenario where bankers and M&A professionals will be more likely to value the business on a multiple of their revenue.
An exception to this would be a tech oriented or software backed healthcare company that is growing rapidly and is not currently generating cash or the cash they are generating is minimal because they are reinvesting back into the growth of the business.
What Types of Healthcare Companies are Attractive to Investment Companies?
Revenue multiples are not typically utilized by investment bankers or private equity companies when coming up with an appropriate value for healthcare businesses. This is primarily due to the fact that healthcare is a sector that does not see parabolic growth the way some tech companies and software companies can. When a company is growing rapidly and all of their cash is being reinvested back into marketing, this is a scenario where bankers and M&A professionals will be more likely to value the business on a multiple of their revenue.
An exception to this would be a tech oriented or software backed healthcare company that is growing rapidly and is not currently generating cash or the cash they are generating is minimal because they are reinvesting back into the growth of the business.
Are Healthcare Service Companies Valuable
A healthcare services company is a type of business that provides various healthcare-related services to patients, healthcare providers, or other businesses. While these are attractive investments for private equity groups and even some publicly traded companies, they typically sell for lower multiples than healthcare companies that are focues on life sciences, pharmaceuticals and even medical devices. These healthcare services can include, but are not limited to:
- Medical billing and coding
- Medical staffing and recruitment
- Medical equipment and supplies
- Medical transportation
- Medical device manufacturing
- Medical laboratory services
- Home health care services
- Rehabilitation services
- Hospice care services
- Ambulance services
- Telemedicine
- Health information management
- Health insurance
- Pharmaceutical and biotechnology services
Examples of healthcare services companies include hospital management companies, health insurance companies, medical billing companies, and home health care providers. These companies typically operate in the healthcare industry and may provide a wide range of services to patients, healthcare providers, and government bodies. They can be either for profit or non-profit organizations, however, only the for profit companies are used in developing market comps or valuations as these are the only ones that are attractive to investors.
Healthcare services companies play a vital role in the healthcare ecosystem, as they help to provide cost-effective and efficient care to patients, as well as enabling the operation of the broader healthcare system. They also provide jobs for healthcare professionals and support research and development in the healthcare industry.
Related
If you are reading up on the valuation of a healthcare company because you are entertaining selling your business, have a look at our guide to selling your healthcare company article.
Life Science and Biotech Company Valuations
A life sciences healthcare company is a type of business that focuses on the research, development, and commercialization of products and therapies in the field of life sciences, which includes the biological and medical sciences. These companies can include, but are not limited to:
- Pharmaceutical companies: which research, develop, and manufacture drugs to treat various diseases and medical conditions.
- Biotechnology companies: which use technology to manipulate living organisms or their derivatives to make products that improve human health.
- Medical device companies: which develop, manufacture, and market medical equipment and devices for diagnosis, treatment, and prevention of disease.
- Diagnostics companies: which develop, manufacture, and market diagnostic tests and equipment for detecting diseases and other medical conditions.
- Genetic testing companies: which offer genetic testing services for identifying genetic predispositions to diseases and other medical conditions.
- Biopharmaceutical companies: which use biotechnology to develop and manufacture drugs, vaccines, and other medical products.
Life sciences healthcare companies play a vital role in the healthcare ecosystem and are therefore very attractive to venture capital firms, private equity investors and even publicly traded healthcare companies. These companies invest in research and development to discover new treatments and therapies for diseases and medical conditions, and make them available to patients. They also provide jobs for scientists and healthcare professionals and support research and development in the healthcare industry.
Life sciences healthcare companies are usually considered high growth companies as they rely heavily on R&D, patents, and FDA/regulatory approvals. These companies may trade at higher multiples than other healthcare companies due to their high growth potential and the long time it takes to bring a product to market.
Quality life science companies are fewer and further between than companies providing healthcare services and are highly sought after by investors. Due to this limited supply and high demand, these companies can go for extremely high multiples and it is not uncommon for investment bankers to receive 20+ strong offers for one of these companies in a competitive sales process.
What is the Middle Market
Like many other private equity groups, Minerva focuses exclusively on investing and buying companies in the middle market.
The middle market refers to a segment of the economy that encompasses companies with annual revenues typically between $10 million and $1 billion. These companies are often privately held and may have a more limited access to capital compared to large publicly traded companies. They are often-times looked at as being too small for investment by major institutional investors such as private equity firms and too large for most venture capital firms. They are considered to be a more stable and consistent source of growth compared to small or early-stage companies and offer a lower risk compared to large companies.
The middle market is considered to be a vital part of the economy as they create jobs and generate economic activity, they also play a key role in innovation and technological advancements. They also help to build local communities and provide services to local population.
Middle market companies are often considered to be less understood or less covered by the financial media and financial analysts, which can make it harder for investors to find information about these companies. However, private equity firms, venture capital firms, and other institutional investors have begun to recognize the potential of the middle market and have started to invest more in these companies.