Treatment Center Value Insights: It’s All About the Multiple (…Or Is It?)
I get asked all the time…’what kind of multiple would my treatment center command?’
‘Not So Fast’…There’s No Straight Answer.
I would go as far as saying it’s irresponsible to give guidance simply in the form of a multiple without knowing the other half of the valuation equation – Adjusted EBITDA. The Adjusted EBITDA can be dramatically different depending on whether it is based on a trailing twelve-month (TTM) period, calendar year, annualized pro- forma, or some other formulation. It can also vary significantly based on the buyer and which adjustments will be considered.
The question should be, ‘what kind of VALUE would my treatment center command?’ which is more complicated.
Let’s take a step back and explain the value equation that is commonly used in the industry.
Value = (Adjusted EBITDA) x (the Multiple), whereby:
Adjusted EBITDA (or Earnings Before Interest, Taxes, Depreciation and Amortization) is a proxy for “normalized” cash flow (normalizing for typical variations in a company’s revenue cycle).
The Multiple is the inverse of the go-forward risk of that cash flow continuing after the transaction is complete. The lower the risk of cash flow deterioration, the higher the multiple. For example, a 7x multiple implies a 14.3% return and a 5x implies a 20% return, so the 5x multiple is viewed as a riskier investment for the buyer, therefore he/she requires a higher rate of return.
Pretty straightforward, right? Well, not always. And here’s why …Adjusted EBITDA is in the eye of the beholder. Consider three case studies to illustrate:
The Fast Growing Company
We represented the seller of an opioid treatment program with the following value drivers:
Trailing 12 months (TTM) revenue of $9,100,000
Trailing 12 months adjusted EBITDA of $2,400,000 (~26% of revenue)
Strong clinical and compliance program
After receiving multiple bids, and after negotiations, the successful buyer (a large private equity fund) came in with a valuation of $34,000,000. Clearly a healthy multiple of 14.2x ($34,000,000/$2,400,000), right? I can assure you the buyer was looking at this differently. Remember, this was a fast growing company that had no seasonality.
Trailing 12 months (TTM) Last 3 months, annualized
Revenue $9,100,000 $16,800,000
Adjusted EBITDA $2,600,000 $4,500,000
Multiple 14.2 7.6
So, what was the multiple? Depends on who you ask. The buyer was telling their board that they got this company for a fair price – a multiple of 7.6 My client, the seller, was telling his golf buddies he sold for a multiple of 14.2x… EBITDA & multiples are in the eye of the beholder.
Corporate Overhead and Synergies
Here’s an example of a multi-location residential treatment center we represented:
Trailing 12 months revenue: $9,600,000
Trailing 12 months adjusted EBITDA: $1,600,000
Strong clinical and compliance program
Primarily in-network revenue
After running a competitive bid process, the buyer agreed to pay $21,000,000. This company commanded a multiple of 13.1x, ($21,000,000/$1,600,000) right? Maybe/Maybe not…
In this case, the seller was paying an annual salary of $500,000 to a high-priced CEO who was not an owner of the company, but a close confidant who had a long business relationship with the seller, and worked part-time in the business. Although he was instrumental in the success of the company, he was not needed by the buyer. The buyer had a regional VP who had the bandwidth to take on these responsibilities. So the buyer would enjoy an immediate $500,000 bump in EBITDA on day one – to $2,100,000. To the buyer, this company was purchased for a multiple of 10x ($21,000,000/$2,100,000).
The Low Margin Business
Trailing 12 months revenue: $5,100,000
Absentee owner, not involved in the day-to-day operation
Trailing 12 months EBITDA: $300,000
Revenue derived primarily from public funding
The sale price was $7,000,000, or a multiple of 23.3x ($7,000,000/$300,000). Clearly not a standard industry multiple for a single-location, privately held treatment center, but it was a competitive process and the company had a high strategic geographical interest to this industry buyer. In this case, the buyer saw opportunity that wasn’t being capitalized by the current owner. This buyer had a very strong marketing group and in-network relationships that could bring the center’s occupancy from 12% to 70% within 12 months. Because of the competitive nature of the offering, they valued the treatment center based on it’s pro-forma financial performance – what they could do with it after the closing.
So that begs the question…what is the multiple of a break-even (or money-losing) treatment center that sells for any price?
It’s all about the value.