EBITDA multiples for valuation of autism ABA practices and other pediatric therapy businesses (OT, PT, ST)
- lflopezcobo
- Jul 19, 2024
- 5 min read
Updated: 2 days ago
Topics: Valuation of ABA autism treatment practices, Valuation of pediatric therapy practices, EBITDA multiples of autism treatment practices, EBITDA multiples of pediatric therapy practices.
We are frequently asked by sellers and buyers what are the EBITDA multiples fo the valuation of autism ABA practices and for pediatric therapy practices. In this article we explain how to use this metric and provide some information about the multiples we see today in the marketplace. Finally, we argue that EBITDA multiples are only one indicator to value a pediatric therapy business. There is a more precise method.
In this article, a pediatric therapy business is meant to be a professional practice that provides treatment for a number of children diagnoses such as autism spectrum disorders, developmental delays, prematurity, Down Syndrome, sensory processing disorders, cerebral palsy, language delays/articulation delays among others. These practices provide services such as Applied Behavior Analysis – ABA, occupational therapy (OT), speech therapy (ST), and physical therapy (PT).
What is an EBITDA and how it is calculated?
The EBITDA multiple is an indicator used to value businesses. It is calculated as the average of the ratio of Enterprise Value to EBITDA.
What is Enterprise Value?
Enterprise Value is defined as the market value of equity (e.g. stock or membership interests) plus market value of financial debt.
What is EBITDA?
EBITDA means Earnings Before Interest, Taxes, Depreciation, and Amortizations. It is a financial measure calculated with information found in the Income Statement of any pediatric therapy business. It is widely used because it is a rough approximation to the cash flow generated by the practice in a given period of time.
What taxes are included in the "T" of EBITDA?
Those taxes refer only to income taxes (state and federal).
What interest is included in the "I" of EBITDA?
Typically, that is the interest related to any loan from banks, other financial institutions, and even loans from shareholders.
What EBITDA to calculate?
Typically, the EBITDA multiple is calculated for the trailing last twelve months of operations at the date of the valuation. In the case of autism practices and other pediatric therapy practices, to apply this methodology correctly, the EBITDA should be adjusted by non-recurrent income and expense items, possibly by the owner’s salaries and benefits, leases, among others.
What are the EBITDA multiples to value autism practices or other pediatric therapy practices?
There is no simple answer for this. Multiples depend on the practice specifics such as cash flow margins and therefore cost structure (particularly payroll), size, infrastructure, buyer “appetite” for the particular practice, management quality, the quality of clinical care, strength of back office, quality of staff, brand recognition, contracts in place, staff turnaround, mix of different therapies, etc.
Today, for very small ST, PT, and OT practices we see EBITDA multiples as low as 3x and as high as 6x. The multiple might increase with the size of the practice. Multiples for larger ABA practices and platform practices extend from about 6x into the lower teens.
What are some of the pitfalls of using EBITDA multiples to value autism practices or other pediatric therapy practices?
When using EBITDA multiples to value a company, particularly in specialized sectors like autism practices, several issues can lead to inaccurate valuations:
Inconsistent Comparables: The group of companies used to calculate a multiple often have different underlying characteristics, such as varying risk profiles, debt levels, and cash flow growth rates. Using a multiple from a basket of companies that are not truly comparable can skew the resulting valuation.
Market Sentiment and "Mood": Multiples are heavily influenced by the current market sentiment and the appetite of buyers. This can cause the multiples to be temporarily too high or too low, reflecting market enthusiasm or pessimism rather than fundamental value.
Crucial Role of Growth: A major factor that multiples often fail to consistently account for is growth.
An autism practice with a strong and increasing growth rate (in revenue and cash flows) should command a higher multiple than a peer with the same EBITDA but stagnant or decreasing growth.
Lack of Public Data (Private Deals): Since virtually all deals in this sector are private, the associated multiples are not public knowledge. An analyst's estimate will often be limited to the first-hand, proprietary information they have gained from their own experience closing sales in the industry.
A significant limitation of relying solely on an EBITDA multiple is that it fails to establish a clear Standard of Value. In other words, a simple multiple misses the fundamental question: "Value for whom?" Are you trying to estimate Fair Market Value, Fair Value, Intrinsic Value, or Investment Value?
Due to these inherent limitations, EBITDA multiples should be used with care and as only one component within a broader set of valuation methodologies.
Is there a more precise method than EBITDA multiples to calculate the value of a pediatric therapy practice?
Yes, given the specifics of this industry, we favored the Discounted Cash Flow ("DCF") method which is a highly effective way to determine a practice's equity value as it provides a comprehensive, fundamental valuation.
The Discounted Cash Flow ("DCF") method is built on the idea that a company's value is the present value of its expected future cash flows.
Financial Projections: The process begins with detailed yearly projections of the practice's future cash flows, Income Statements, and Balance Sheets for a specific forecast period.
Critical Role of the Discount Rate: It is essential to accurately estimate the discount rate(s) used to bring those future cash flows back to a present value. This rate is highly complex and depends on factors such as:
The practice's financing structure (mix of bank debt and owner equity/debt).
Expected changes in debt levels over time.
A size premium (as smaller practices often carry higher risk).
The required rate of return for the owner's equity capital.
Capturing Intrinsic Value: The DCF methodology is unique because it intrinsically captures all the financial strengths and weaknesses of the practice, as well as the value of its intangible assets (e.g., brand recognition, patient list, favorable payor contracts, and reputation).
The final step involves adjusting the calculated Present Value of the cash flows to arrive at the final equity value:
The Present Value of Future Cash Flows is adjusted by:
Adding excess cash (cash above the normal operating requirements).
Adding the market value of non-operational assets.
Subtracting the total financial debt.
Subtracting any hidden liabilities.
Additional resources:
If you need assistance selling or valuing your pediatric therapy practice, contact us
If you need to read more about how to sell your pediatric therapy practice (ABA, OT, PT, ST), click here.
If you need to know about current trends in selling pediatric therapy practices, click here
If you need to read more about selling a business, read more
If interested in reading more articles and insigths by Mergium, click here
If interested in knowing about our experience in selling / acquiring healthcare services companies, click here
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