Introduction to the Valuation of Clinical Services Businesses
This guide provides an overview of the key factors influencing the valuation of clinical services businesses.
Clinical services businesses are generally valued by applying an Earnings Multiple to the profits (usually the EBITDA) of the business.
For example, an Earnings Multiple of 8x applied to EBITDA of £2.5m would lead to a valuation of £20m for the business. Most valuations of this nature are made on a cash-free, debt-free basis, which will be discussed later.
Underlying EBITDA
While EBITDA may seem straightforward, it is often adjusted during the valuation process to reflect the true underlying profitability of the business to an acquirer or investor. This is referred to as the Underlying EBITDA.
A number of adjustments are typically made to the EBITDA to present the most favourable figure for valuation purposes. Exceptional costs, one-off expenses, or costs that will not continue post-transaction should be “added back.” Any pro-forma adjustments, such as the inclusion of revenue and associated profits from newly secured contracts, could also be factored in.
Earnings Multiple
Earnings multiples in the clinical services sector are influenced by various factors. These factors are unique to the industry and can significantly impact the multiple applied. Presenting these drivers in the best possible light will help to maximize the value achieved.
Scale
The scale of the business is the factor that has the largest impact on the earnings multiple applied.
This generally relates to the EBITDA, but also to the revenue of the business, with larger businesses viewed as more established and therefore with a lower risk of material decline.
Security and Visibility of Revenue
Acquirers will generally apply a premium multiple to businesses where there is strong revenue visibility and/or recurrence.
For clinical service businesses supplying the NHS, exclusive ICB or Trust contracts are generally preferred to AQP due to greater certainty over patient volumes.
For private pay services, businesses with a heavy reliance on direct-to-consumer pay-per-click marketing may attract a lower earnings multiple due to perceived price sensitivity and patient acquisition costs.
Growth Potential
Acquirers and investors generally seek growth from their acquisitions. Businesses with strong growth trajectories and proven capacity for expansion are highly valued.
Team
The quality of the leadership team is critical, particularly for private equity investors. An established and capable team ensures that the sustainability of profits is more secure, resulting in a higher earnings multiple.
Technology and Innovation
Companies leveraging innovative technology to improve efficiency and scalability (e.g., digital platforms or telehealth solutions) are generally highly attractive to acquirers and investors.
As such, tech-enabled clinical services (e.g., teleradiology) businesses generally attract a higher multiple than those offering a more traditional service.
Illustrative Valuations Within Clinical Services
Service Offering | Scale | Earnings Multiple |
Physiotherapy | £1m EBITDA | 5-6x EBITDA |
Community-based dermatology | £3m EBITDA | 7-10x EBITDA |
Teleradiology | £5m EBITDA | 12-15x EBITDA |
Cash-Free, Debt-Free Offers
It’s important to note that valuations of healthcare businesses are generally produced on the basis of being "cash-free, debt-free."
In simple terms, this means that any cash in the business is retained by the seller and that all debt is repaid by the seller upon completion. Transactions should also include an adjustment to "normalise" working capital. This prevents the acquirer from having to inject funds into the business if there is insufficient working capital to run the business after completion.
This adjustment is usually calculated by comparing the working capital at completion of the transaction against the average working capital over the recent past.
Example Calculation
Enterprise Value: £20m (Underlying EBITDA x Earnings Multiple)
Add Cash on Balance Sheet: £2m
Minus Debt and Debt-like Items:
Bank Loans: (£5m)
Corporation Tax: (£0.5m)
Plus/Minus Working Capital Adjustment: £0.2m
Equity Value: £16.7m (value payable to shareholders)
Selling Your Healthcare Business?
Valuing a clinical services business requires a nuanced understanding of the sector’s dynamics.
We are specialist mergers & acquisitions advisors to the UK healthcare sector. We have access to a range of data in order to provide guidance on suitable valuation expectations for sellers across a range of clinical services sub-sectors. Areas we cover include:
NHS insourcing and outsourcing
Physio & MSK
Audiology
Dermatology
Teleradiology
Ophthalmology
Telemedicine
Diagnostics
Reproduction and fertility
ADHD & autism assessments
Psychiatry and psychology
Aesthetics and cosmetic procedures
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