As an M&A advisor, the No. 1 question everyone asks is: What is my DME business worth? I usually answer with the truth, though it may sound like I am being crass—your business is worth what someone else is willing to pay for it. Generally, most people like a more specific answer, and they have done a little research to understand how the markets are currently performing. This is usually where things go wrong. As most business owners begin to read the available data, they start to understand that ROI (return on investment) is what drives most of the prices. ROI is usually measured with annual EBITDA (earnings before interest, taxes, depreciation and amortization). Given the risk of the marketplace, among other factors, companies multiply EBITDA by a number to achieve the actual selling price, commonly known as a multiple. Here is where the problem arises. According to numerous external market sources such as Axial, Pitchbook and GF Data, the average multiple of EBITDA for health care companies ranges from 6.5 to 11 times. Additionally, many private equity firms are adding fuel to this fire by publishing their own health care M&A data, primarily to encourage reluctant sellers to enter the market. A number 6.5 to 11 times EBITDA is quite a range, and there is excitement because these are the highest multiples of the past decade. The problem with this recent data, as well as that provided by other M&A, private equity and analytics firms, is as follows:
- The “lower middle market” is commonly defined as $10 million to $250 million in annual revenue. This is a huge span of economic activity, and there is typically a significant difference in operational capacity and access to capital across this span, depending on the market segment.
- Even with this definition, the transaction studies cover only a very small percentage of companies. According to the U.S. Census Bureau, there were 27 million businesses in the U.S. in early 2014, with only 300,000 earning more than $5 million in annual revenue and only 150,000 earning more than $10 million in annual revenue. How representative is this data for all of the other health care businesses that are trying to use the data to make informed decisions?
- Because of the small sample sizes (Axial and GF Data cited 30 total transactions to date in 2014) and the likely high variance, how useful is this data to the average lower middle market health care business owner?
- The statistics tell us nothing about what factors, apart from EBITDA, come into play: location, relevance to buyer strategy, regulatory environment, timing and market position.
The fact is that the vast majority of lower middle market (and below) transactions are never recorded in any database. While this is understandable from a privacy perspective, it helps to observe the market values that would be useful to sellers and buyers. One of the larger 2013 health care acquisition reports by Irving Levin Associates lists several hundred transactions, but very few yield any relevant information such as price/revenue or price/unit. It’s confidential. Ultimately this leaves DME business owners misguided as to what the actual marketplace multiples really are and creates false expectations. This is why a trusted M&A advisor who has experience in the DME market is worth the expense.