One of the things we often discuss with our clients is the impact of the size of a healthcare services organization on its valuation. Generally larger companies are considered less risky, which leads to higher multiples and lower discount rates - and therefore higher valuations. The primary reason larger companies are considered less risky is they are more diversified in terms geography and/or services provided. For outpatient and home-based health services businesses, this typically means more locations. Smaller companies are more susceptible to major changes in operational performance due to external factors, like increased local competition or regulatory changes.
Many larger companies also have talented business development teams with track records of high growth, often through acquisition, with strong returns on capital - which also leads to higher valuations. These companies are referred to as “platforms” because they’ve established a repeatable operating model, have the internal resources to grow by sourcing and negotiating deals, and have a history of successfully integrating acquisitions.
The general concept of a platform is to buy 20 small shops at 5x EBITDA and then sell your large, multi-location platform for 10x.
The chart below includes data from over 200 transactions since 2010 involving outpatient and home-based health services businesses, and compares the valuation multiple to the size of the business acquired (size measured in terms of EBITDA). The transactions involving companies that generated EBITDA less than $5 million generally occurred in the 4x to 7x range, with a few exceptions, while the platforms generally range from 7x to 15x.
Occasionally, we’ll hear someone use a platform as a comp when putting a number on a “mom and pop,” or vice versa. Our strong recommendation is to either limit your pool of comparable transactions to those of similar size, or to “size-adjust” the multiple you use. We’ll be writing more about making size adjustments shortly.