Valuation of Healthcare Companies In A M&A Transaction

The Healthcare space is heavily involved in M&A transactions. Valuation of these types of transactions is mainly focused on EBITDA (earnings before interests, taxes, depreciation, and amortization) multiples. EBITDA multiples are derived from dividing the Enterprise Value by EBITDA. The higher the multiple, the higher the Value. The Healthcare space consistently sees multiples of 13x EBITDA and up[1].

Two other main factors used to evaluate healthcare transactions are Risks and Growth. Plain and simple, low risk and high growth potential are desired when evaluating a healthcare transaction. The main risk associated with healthcare transaction is the level of reliance on federal reimbursements. Healthcare organizations which rely mostly on federal reimbursements are considered to be a high risk. Those that have a functional diversity of federal reimbursement and private payments are considered to be less risky.

Growth and the ability for future growth are highly desired when entering into an M&A transaction. Growth can occur either organically or through acquisitions. Healthcare organizations which have an established platform for growth are considered more valuable. Growth through acquisitions is the dominant growth strategy in the healthcare industry. Larger healthcare organizations are able to develop and hire talent to facilitate growth.


[1] Duff & Phelps, Healthcare Services Sector Update Dec. 2017

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