Are We There Yet? 4 Perspectives On Emerging Healthcare Transaction Data

By Tom Schramski, PhD, CMAA

Volume 2 Issue 5, March 3, 2015

unnamed (2)One of the biggest challenges in the healthcare middle market is finding accurate data on M+A transactions, including deal specifics like multiples of adjusted EBITDA.  This issue is even more pronounced in the lower middle market where hundreds of companies of $10-50 million revenue are sold each year.

Vertess has recently forged a relationship with GFData, winner of 2014 AMAA Middle Market Thought Leader Of The Year Award, to address this concern.  GFData provides detailed information on successful transactions between $10 and $250 million across the country, including healthcare and related services/products, in the $10-50 million lower middle marker segment.  What is unique about their approach is that they confidentially collect data on various aspects of each transaction, allowing us to dive much deeper into the truth of each deal with like comparisons to similar transactions.

Based on their data for the fourth quarter of 2014, this is what we believe we have learned:

  • 4Q 2014 multiples of EBITDA across all M+A transactions declined overall for the first time since late 2007.  This suggests the possibility that the seller’s market that has been prevalent for some time may be waning. There are numerous exceptions to this observation, with exceptions usually driven by the unique characteristics of the individual company, including above average profitability.
  • In healthcare specifically, the multiples of EBITDA remain largely the same in the $10-50 million revenue category, but, on average, have declined slightly in the $50-100 million range.  There could be many reasons for this and it is clear to us that the continuing interest of private equity groups (PEGs) in the $10-50 million healthcare marketplace is positively affecting valuations.
  • Leveraging of healthcare deals continues to be relatively light unless there is a remarkable product (as in medical devices/equipment), and the debt levels are higher for add-on acquisitions compared to platform deals.
  • Deal activity in lower middle market healthcare continues to be robust in all areas and especially in behavioral healthcare, substance abuse treatment, intellectual/developmental disabilities (including autism), medical equipment/devices, urgent care/ambulatory surgery centers, and homecare/hospice.

What does this data mean for you?  If you are looking to transition there remains strong buyer interest in multiple healthcare verticals with many financing approaches available.  Buyers are also becoming increasingly sophisticated and are looking for more creative options for expansion (e.g. replication of their own service delivery models via de novo activity) when they cannot find an acceptable acquisition.

There also appears to be pent up seller interest in the Baby Boomer population who are looking to time things right.  Like all economic trends, there are better times than others and we believe that today’s favorable conditions will not last forever.  A decision to transact should incorporate this macro view balanced with your personal goals and objectives.

Transcending these factors is an age-old truism: if your business performance is strong and sustainable it will always be easier to find a buyer or a partner than if this is not the case.  You may find the one-in-a-million product or secret sauce, but most great transactions come from keeping your eye on the ball and aligning your human and financial resources behind that effort.