Valuation

It is very important that a seller knows the “current market value” before they decide to sell their business. To have the wrong value or unrealistic value placed on a business can cause the business harm in the market place. If the business is over priced buyers will not take the offering seriously and may pass before truly looking at the business. If the business is under valued the seller has lost money before they even get started.

EBITDA

There are many factors that determine the value of a business. At present, most health care companies are sold on a multiple of EBITDA. The term most commonly used may be referred to as “adjusted EBITDA or Cash Flow”. EBITDA, meaning Earnings Before Interest Taxes Deprecation and Amortization. ADJUSTED, commonly referred to as “add backs”, is when you add back certain expenses. These expenses could include, one time expenses (expenses paid one-time and will not be a reoccurring expense), other examples may be a move to a new office, legal fees, owner’s compensation and perks if the owner or owners decide to exit after a sale.

Multiples

Each industry has a multiple range that is multiplied times the Adjusted EBITDA or Cash Flow to determine value. The next step is to determine what type of multiple would be applied to your business. Let us take multiples being paid today in Home Health. The average is 3.5 to 6x Adjusted EBITDA or Cash Flow. What determines if your agency is at the top or the bottom of that scale?

1. Gross and Net Revenues
2. Stand alone or hospital based
3. One location or multiple locations
4. CON States, location
5. Years in business
6. Management structure
7. Type of payor breakdown

Examples of a 5-6 multiple

An agency with revenues above 10 million, multiple locations, located in a CON state with a strong management structure in business over 5 years and has 70% or more in Medicare revenues.

Example of a 3.5-4.5

An agency with one location, not in a CON state, less than 10 million in revenues and the owners want to leave once the transaction is consummated and the transition period is completed.

*Each home health is different and the above is general examples.

It is very important to know the value of a business before offering it for sale. It is also important to choose a medical business broker that has a proven track record of closing transactions within the last twelve months because multiples and the way medical business are valued is always changing.

In addition to knowing the value of the business it is also very important to work with a Mergers and Acquisition firm that know the industry. At Abstract it is our job to keep up with current buyers and to weed out the tire kickers. Matching a business with the right buyer will in the end bring the seller the optimal value.