Medical billing companies process claims and manage reimbursement on behalf of healthcare providers across the United States. As more practices outsource this work to reduce overhead and improve cash flow, the industry has become an increasingly attractive opportunity for buyers and entrepreneurs. If you are looking to buy, grow, or sell a medical billing company, obtaining a professional business valuation is an important first step. It provides insight into the company’s worth and risk profile, promoting informed decisions. For an easy value estimate, many owners and buyers turn to valuation multiples for a medical billing company. In this article, we explain what multiples are and how to use them to value a business. We also highlight the most common medical billing company valuation multiples.
Peak Business Valuation is a professional appraisal firm that regularly works with owners and buyers in the medical billing space. Our valuation experts can help you understand the true worth of your medical billing company. In addition, we can address any questions you may have about the medical billing company valuation process. Schedule a free consultation below to get started!
Valuing a Medical Billing Company
When valuing a medical billing company, business appraisers may apply various valuation methodologies. One of the most common business valuation approaches is the market approach. The market approach often involves using valuation multiples to compare similar medical billing companies that have recently sold. Additionally, business appraisers account for the risks and value drivers for a medical billing company. Owners and buyers can use this analysis to make informed decisions and maximize the value of a medical billing company.
Valuation Multiples for Medical Billing Companies
Peak’s data below shows the typical range of valuation multiples for a medical billing company. Business appraisers calculate these figures from transactions involving comparable billing companies, often using SDE, EBITDA, or revenue as the metric.
Disclaimer: These multiples are for educational purposes only. As such, the information provided does not constitute valuation advice. These multiples do not represent the valuation opinion of Peak Business Valuation or its valuation professionals. Instead, seek the guidance and advice of a qualified business valuation professional about any matter in this article.
What is a Valuation Multiple?
Valuation multiples are ratios that compare a company’s sale price to a specific financial metric, such as revenue or cash flow. Business appraisers derive these ratios from real-world transaction data involving similar companies. Applying an appropriate multiple to a medical billing company gives owners and buyers a rough estimate of value. Below, we cover the three most common valuation multiples for a medical billing company, SDE, EBITDA, and revenue. For additional explanation, see What is a Valuation Multiple?
SDE Multiples for a Medical Billing Company
Average SDE Multiple Range: 2.40x – 3.80x
Peak’s database shows that medical billing companies often sell within an SDE multiple range of 2.40x to 3.80x. Valuation experts calculate a company’s value under this method using the following formula:
SDE × Multiple = Business Value
Consider a medical billing company that generates $350,000 in SDE and sells at a 3.10x multiple. Its implied value would be $1,085,000.
$350,000 × 3.10x = $1,085,000
To determine a company’s SDE, valuation analysts add back the owner’s personal expenses, salary, and other discretionary or non-recurring costs to the company’s net income. This adjustment reflects the true cash flow available to a new owner of the medical billing business. To learn more about calculating SDE, see Understanding Seller’s Discretionary Earnings.
If you want to know what your medical billing company might be worth, Peak Business Valuation can help. You can reach out with any questions about valuation multiples for a medical billing company. Schedule your free consultation with Peak Business Valuation below.
EBITDA Multiples for a Medical Billing Company
Average EBITDA Multiple Range: 3.40x – 6.00x
Medical billing companies generally transact at EBITDA multiples between 3.40x and 6.00x. The formula is as follows:
EBITDA × Multiple = Business Value
If a medical billing company earns $500,000 in EBITDA and sells at a 4.50x multiple, its estimated value would be at $2,250,000:
$500,000 × 4.50x = $2,250,000
EBITDA gives buyers a straightforward way to compare medical billing companies of different sizes and ownership structures since it strips out financing and accounting decisions. This multiple is common for larger companies with an established management team already in place.
Revenue Multiples for a Medical Billing Company
Average Revenue Multiple Range: 0.70x – 1.20x
Revenue multiples for a medical billing company typically fall between 0.70x and 1.20x. The formula is as follows:
Revenue × Multiple = Business Value
If a medical billing company brings in $1,800,000 in annual revenue and transacts at a 0.95x multiple, its estimated value would be $1,710,000:
$1,800,000 × 0.95x = $1,710,000
Because revenue does not account for profitability, Peak Business Valuation generally gives it less weight than SDE or EBITDA when valuing a medical billing company. However, it can still offer helpful insight, particularly for medical billing companies with strong recurring contracts. Business appraisers determine which multiple is best for your company during the valuation process.
Summary
Valuation multiples for a medical billing company offer a rough estimate of the company’s worth. SDE, EBITDA, and revenue multiples each capture a different piece of the company’s financial picture. This is why business appraisers often use them together for a more complete valuation. It is important to note that multiples do not account for the unique factors that influence the value of a specific medical billing company. Working with a professional business appraiser is the best way to ensure a reliable conclusion of value.
Peak Business Valuation has experience helping owners and buyers understand what a medical billing company is worth. If you have any questions about the medical billing company valuation process, we are happy to assist! Schedule your free consultation with Peak Business Valuation below to get started!
