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Investing in Healthcare Services: “Platforms” Explained in One Chart

Private equity investment in healthcare services has been booming for many years now. In the right hands, outpatient and home-based health services businesses tend to have strong growth characteristics and generate healthy margins with relatively low risk compared to some other sectors. As low-cost providers, they benefit from increasing industry-wide focus on cost management and patient choice. They also benefit from an aging population, and are relatively recession resistant.

As if investors needed more, the industry is huge, and massively fragmented - which presents the opportunity to create platform companies that roll-up smaller service providers. The general concept is that you can buy 20 small shops at 5x EBITDA and then sell your large, multi-location platform for 10x.

The chart below includes data from over 200 transactions since 2010 involving outpatient and home-based health services businesses, and compares the valuation multiple to the size of the business acquired (size measured in terms of EBITDA). The transactions involving companies that generated EBITDA less than $5 million generally occurred in the 4x to 7x range while the platforms generally range from 7x to 15x.

Technical note – we excluded capital intensive businesses like radiation therapy and diagnostic imaging.

Sound like a simple way to make a buck? Developing a team that is skilled at sourcing and negotiating deals, successfully integrating acquisitions, and executing an operating model that adds value by both improving patient care and increasing profits probably isn’t easy work… but those are the things that get investors to pay top multiples.


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