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What are Healthcare Services “Platform” Companies and Why are They Worth More?
Will Hamilton • August 20, 2018
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.
We ranked the 30 largest healthcare services and information technology deals of 2018, according to our database, by valuation multiple. The lowest reported price to EBITDA multiples (10x or lower, sorted alphabetically) are listed below.
We ranked the 30 largest healthcare services and information technology deals of 2018, according to our database, by valuation multiple.
We ranked the 30 largest healthcare services and information technology deals of 2018, according to our database, by valuation multiple. The highest reported price to EBITDA multiples (15x or higher, sorted alphabetically) were as follows:
Healthcare services organizations rely on a variety of intangible assets to create business value, including patient and customer relationships, medical records, trade names, assembled workforce, licenses and certifications, non-compete clauses, proprietary technology, software, and others.
For those of you who’ve been involved in a transaction where the only asset transferred is a certificate of need, you’ve probably found that market data is scarce for CON-only deals.
CON Laws, Scope of Practice Restrictions, and Provider Non-Compete Clauses Targeted in New Trump Adm
On Monday, December 3, 2018, the Department of Health and Human Services (HHS) – in collaboration with the Departments of the Treasury and Labor, the Federal Trade Commission, and several offices within the White House – released a report detailing recommendations for improving choice and competition in the healthcare industry.
One of the questions we get asked a lot is how valuations have changed over time.
One of the many benefits of tracking healthcare transactions closely and maintaining a very large database of deals where we can get reliable price to EBITDA and revenue multiples is that it provides insight into profit margins for segments where other financial benchmarking information is sparse.
The most important component of a valuation of an accountable care organization (or other multi-provider network that relies on risk-based shared savings models) is the revenue forecast, which involves “probability-adjusting” future shared savings payments in some manner.
CMS' offers a helpful online tool that shows provider market saturation levels at the national-, state-, and county-levels for the following health services:
