The Current Valuation Market and your UCB
When considering taking your urgent care business to market, it is imperative that you understand the market value of your business at the time of your desired transaction. Understanding the current market will help you understand the value of your business in the market, and could prevent you from leaving dollars on the table after the ink on the contract has dried.
Joshua Kaye, managing partner of DLA Piper says that in terms of making a determination of a business’ value, a lot will be driven by the size.
“What that will be driven upon, in part, would be your EBITDA, which is how most companies are valued on a sale. A company generating a million in EBITDA is not going to attract the same type of multiple as a company generating close to $10 million or more than $10 million of EBITDA would attract. The higher multiples go to the companies that are generating a greater level of EBITDA,” Kaye says.
Kaye says that some questions to ask before making the decision to sell include: Do you have one center open? Do you have ten centers open? What is your pipeline for growth? How well has your concept been proven?
“I view these as also barriers to a successful sale. The fact that you want to sell at this point in time, may not necessarily mean that you can successfully sell at this point in time; at least for the type of multiples that would demand a premium,” Kaye says.
Blayne Rush, president of Ambulatory Alliances explains a usual situation he is placed in when it comes to potential sellers.
“I get about 5 calls a week that after about 5 minutes the caller is asking what their business is worth, and I tell them it is worth as much as someone is willing to pay for it,” Rush says. “That is as accurate of a valuation I can give after 5 minutes. It is a little like a 5 minute phone a doctor consults with a patient that has high blood pressure, is overweight, smokes, has COPD and diabetes, but is in denial and thinks they are in picture perfect health.”
Rush says that valuation by definition is forward looking and consists of buyers and investors investing in the future cash flow of the business involved in the transaction.
“When we speak of valuations or deal pricing the default is to discuss it in terms of multiples of EBITDA, Earnings Before Interest Taxes Depreciation and Amortization; but EBITDA is backwards looking, or a historical view and you can influence EBITDA,” Rush says.
Rush adds that some buyers buy a company based off of a multiple of EBITDA, but the reality is that the more complex transactions will be valued via a Discount Cash Flow method, a Gordon Growth Model or some hybrid. These results are then communicated as a multiple of EBITDA.
Rush says that speaking to actually multiples is a little deceiving and it depends on what side of the deal the party is on.
In an example, Rush says a deal traded for $30 million. The EBITDA was $2 million.
“When you ask the seller what multiple they sold their business for, they will tell you they sold for 15, but when you ask the buyer they tell you they bought it for 5 times.”
Who is lying? Rush asks. The answer is neither one.
“The buyer ran their DCF, with synergies, added efficiencies such as better coding, billing, collections, right sized staffing etc and says the business would have a $7.5 million dollar EBITDA under their system. So be careful when discussing multiples,” Rush says.
Rush says what buyers, investors or valuators will do is make appropriate adjustments to the revenue and profits of the business. They will then project out the revenue of the business for 5 or 7 years (most will take 5 years) and add in a growth rate. The greater the anticipated growth, the bigger the growth rate will be. Rush says cost of capital will be added, reduced by the zero risk return on investment and there is a percentage chance that they will be wrong; so they will discount all of this with a discount rate.
“They will come up with a dollar amount and present that as a multiple of EBITDA. Because the market is growing, that growth rate is higher compared to more mature areas of healthcare thus we are seeing the higher multiples,” Rush says. “With the larger transactions we are seeing great interest from many types of buyers and many have synergies. Synergies are cost savings, and revenue enhancements from business combinations. That also will be taken into account when adjusting the revenue and profits. The smaller transactions will typically not have enough leverage to receive a pure bump from synergies, but will from greater competition.”
Rush says when it comes to smaller transactions and non platforms, it must be considered who gets the AR, determine any working capital contributions required, determine if the buyer is paying for tail coverage, what is the compensation to the physician owners going forward, if you own the real estate what the lease looks like etc.
“This all is important and you better make sure when you are selling that it all ends up in your LOI; Because transactions die 200 deaths between hello and closing,” Rush says.
Rush says in cases of small transactions investors are seeing 5 to 7.5 multiples, and the larger deals are seen to go as much as 15 multiple.
“The smaller platforms are trending closer to the multiples we are seeing for the larger deals thus they are across the board and it depends on many factors. The devil is in the details of the deal,” Rush says.
Scott Witter, director of business development, M&A at U.S. Health Works also has some thoughts on smaller one to five clinic chains in the market.
“There are less buyers out there. There is less interest out there. So you are going to see a little bit potentially lower multiples. Often, there is a little bit less of a growth rate. Using multiples can be difficult because of different perspectives and the different situations involved, the different trends in
the business, the different growth rate. It can tend to be all over the board,” Witter says.
Rush adds that when speaking about valuations, another concept that should be understood is Arbitrage.
“Arbitrage is, simply put; buying an urgent care low and turning around and selling it high in order to profit from difference in the price,” Rush says.
Rush explains that Arbitrage comes into play when selling to a financial sponsor or a strategic buyer that is backed by a sponsor. This is in comparison to a strategic buyer that is looking to hold their platform essentially forever.
“Think of it as in terms of flipping a house. Investors buy it low, fix it up, or sometimes they just sweep the floors, and sell it for much more. The large platforms for the most part invest in your urgent care and make money by reducing the inefficiencies by adding a more robust EMR, lowering staff cost, supply cost etc, by improving revenue though coding, billing, collecting, better contracts, marketing etc.,” Rush says. “Some are also looking to sell their business in the future.”
Rush says these types of buyers of your urgent care business command a much higher multiple when they sell their business than what they will buy your business for. This means everything else being equal, the buyers that are looking for an exit themselves, will many times be able to pay a little more than the buyers that are holding forever because they factor in the arbitrage, Rush says.
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