More than Meets the Eye in Home Health M&A Valuations
When a home health acquisition occurs, a single trading multiple is announced for the deal — and in home health, there have been some impressive multiples lately. However, there could be a case for more than a single multiple on any given transaction, as the buyer and seller might have different ways of thinking about that number.
The mean trading multiple for home health and hospice deals last year was 15.2, outpacing every other major health care sector, according to a report from PricewaterhouseCoopers. In a deal with a 15.2 multiple, the buyer values the enterprise as worth 15.2 times EBITDA (earnings before interest, taxes, depreciation, and amortization).
These eye-popping multiples typically are associated with big transactions involving publicly traded home health companies or large home care franchisors, says Cory Mertz, co-founder and managing partner at Mertz Taggart, a Florida-based health care M&A advisory firm.
So, prospective middle-market sellers should not necessarily expect to command a similar multiple. In addition, they should be aware that there is often more than meets the eye when it comes to the multiple, Mertz says.
Specifically, the buyer and seller might have two very different ideas of what it is.
“Once they’ve got the deal secured, buyers do share with us how they presented the deal to their boards or corporate officers, to justify the price,” Mertz tells Home Health Care News. “Usually it’s a result of showing the decision makers what kind of cash flow the opportunity is going to present, almost immediately.”
To illustrate this point, Mertz Taggart recently broke down some deals in its “Value Insights Series” blog.
Take the example of a fast-growing agency. It had a trailing 12-month adjusted EBITDA of $2.2 million, and the buyer valued it at $17.6 million. This appears to be a healthy 8x multiple.
However, when presenting this agency to the prospective buyer, Mertz and his team focused on the performance only over the most recent six-month period. On an annualized basis, this equated to $14.4 million in revenue and an adjusted EBITDA of $2.8 million. Using these numbers, the multiple on the deal was 6x.
The case to the buyer was that the agency’s strong performance was due to its growth, not seasonal factors, and would continue going forward.
“Not all buyers will look at a six-month trailing EBITDA rather than the standard twelve months, but some will,” Mertz says. “It’s got to be sustainable growth.”
Another example is the case of a hospice paying its CFO a high, $200,000 annual salary. The buyer knew it would immediately stop paying that wage after the acquisition, because it would install its own existing CFO in that position.
So, the seller calculated a multiple based on its existing $800,000 EBITDA. The buyer calculated a lower multiple using an EBITDA of $1 million, with that $200,000 in savings baked in.
For the sake of getting deals done, it can be useful that buyers and sellers can think of the multiple in different ways, says Mertz. But it illustrates why a seller shouldn’t be too concerned with getting a certain multiple before a deal is in process.
“Potential sellers come to me all the time and ask, what kind of multiple would my company command?” he says. “But it’s not the best approach, to try to give a multiple in a vacuum. You have to put it in the context of the overall transaction.”
Written by Tim Mullaney
- calculate M&A numbers: Pexels