With the merger & acquisition activity in the rehabilitation industry continuing to heat up, the first step when considering some sort of exit strategy is a proper valuation of your rehabilitation practice.
Business valuations are much more of an art than a science. Make sure that whomever values your business has experience in healthcare, more specifically, within the rehabilitation industry market. It would be to your advantage to work with someone who not only has valuation experience, but also transaction experience in the rehabilitation market. You want to know how much your business would sell for if you were to put it on the market today.
So, how do we value a rehabilitation business? First, we need to determine what the earnings of the business, defined as EBITDA or Earnings Before Interest Taxes Depreciation and Amortization, are.
EBITDA is your true cash flow. It’s the earnings of the business after expenses, including the replacement salary for the owner(s). Once your EBITDA is calculated, you can begin to determine the value of your business by multiplying the earnings (EBITDA) times the risk in the business. A higher multiplier would be utilized if there is less risk in the business. A lower multiplier would be used if there is more risk in the business.
Risk can be broken out into three distinct categories:
- Size of business. There is less risk in larger business than a smaller business.
- Earnings risk. What is the certainty that those earnings will continue in the future? Influencing factors may include whether or not an owner is inclined to stay on after the sale; the operational metrics of the business and how they compare to national benchmarks; is there a increasing or declining trend in earnings?
- Diversity of the referral base. In all businesses that are focused on third party referrals the diversity of the referral base has an enormous impact on the business.
We’re finding multiples are ranging anywhere between two times and seven times EBITDA. It’s within the risk analysis discussed above that will determine your EBITDA multiple.
In future posts we will discuss key value drivers and what you can do to maximize value in your rehabilitation business.
