How to Value a Medical Supply Company
Medical supply companies sell medical equipment, instruments, and supplies. This includes gloves, masks, gowns, surgical instruments, sutures, etc… The medical supply industry has seen healthy revenue growth in recent years. This is likely a result of increased demand during the 2020 pandemic. Moving forward, IBIS World expects revenue and profit margins to continue to grow. This is beneficial if you are looking to buy, grow, or sell a medical supply company. It is important to note that the medical supply industry is extremely fragmented and competitive. To succeed, it is important to understand how to value a medical supply company.
To learn how to value a medical supply company, it is best to receive a business appraisal. During a business appraisal, a valuation analyst determines the fair market value of a medical supply company. In addition, the expert will highlight the risks and opportunities of your medical supply company. This information is crucial if you are looking to increase the value of your medical supply company.
Peak Business Valuation is here to assist! As a professional business appraiser, Peak Business Valuation works with medical supply companies on a regular basis. We are happy to provide you with a business appraisal for a medical supply company. In addition, Peak can discuss any inquiries on valuing a medical supply company. Schedule your free consultation by clicking the link below!
How to Value a Medical Supply Company
When deciding how to value a medical supply business, business appraisers consider various business valuation approaches. The most common valuation approaches are the market approach and the income approach. Each approach provides a different perspective on the value of a medical supply company. During the valuation process, a valuation expert will determine which approach(es) is best for your medical supply company.
Valuing a Medical Supply Company Using the Market Approach
The market approach is common when valuing a medical supply company. This valuation approach is similar to how a real estate appraiser values a home. During the real estate appraisal process, real estate appraisers compare similar properties that recently sold on the market. This allows them to accurately calculate the value of a home. When valuing a medical supply company with the market approach, business appraisers consider similar businesses that recently sold on the market. If the business is private, the valuation analyst refers to private transaction databases to gather relevant information.
Multiples for a Medical Supply Company
Valuation multiples are a defining characteristic of the market approach. Multiples are financial ratios that assess the value of a medical supply company based on metrics such as cash flow, earnings, or sales. To determine the proper valuation multiples for a medical supply company, business appraisers apply the appropriate NAICS or SIC code. Below, we discuss SDE, EBITDA, and REV multiples for a medical supply company.
SDE (Seller’s Discretionary Earnings) Multiple for a Medical Supply Company
- The SDE multiple is common when valuing a medical supply company. This valuation multiple measures the value of a medical supply company in relation to its seller’s discretionary earnings.
EBITDA Multiples for a Medical Supply Company
- EBITDA multiples reflect a medical supply company’s earnings before interest, taxes, depreciation, and amortization. This indicates the return on investment (ROI) a medical supply company can generate.
REVENUE or SALES Multiples for a Medical Supply Company
- The REVENUE or SALES multiple measures the value of a medical supply company based on the total amount of revenue or sales it generates.
To learn more about the value of a medical supply company using the market approach, see Valuation Multiples for a Medical Supply Company.
Valuing a Medical Supply Company Using the Income Approach
The income approach is another common business valuation approach. When using the income approach to value a medical supply company, business appraisers assess its future income potential. In addition, the income approach considers the risks associated with buying or selling a medical supply company. We discuss a few of these risks below.
-
- Supplier Relationships: Medical supply businesses purchase and resell medical goods. As such, it is vital for medical supply businesses to have strong supplier relationships.
- Financial Performance: Many medical supply businesses struggle to increase or retain profitability. To succeed, it is vital to have strong financial planning and budgeting in a medical supply business.
- Competition: The medical supply industry is very fragmented and competitive. As such, it is important to differentiate from competitors.
- Location: Medical supply companies primarily sell to hospitals and other medical institutions. It is best for medical supplies to locate near these key markets.
Methods to Value a Medical Supply Company Using the Income Approach
Under the income approach, there are several ways to value a medical supply company. The most common income approaches are the capitalization of cash flow method and the discounted cash flow method. Below, we discuss how to value a medical supply business using the capitalization of cash flow approach and/or the discounted cash flow method.
Capitalization of Cash Flow Method
- The capitalization of cash flow method is best for medical supply companies with long and stable histories. When using the capitalization of cash flow method, valuation experts determine a reasonable amount of income for one period. The income is then divided by a capitalization rate which represents an appropriate rate of return investors can expect. The capitalization of cash flow method also considers any risks that may prevent investors from meeting expected earnings. We discuss a few of these risks above.
Discounted Cash Flow Method
- The discounted cash flow method is ideal for medical supply companies with strong financial histories or reliable forecasts. This income approach involves projecting future earnings over a 3-5-year period. The business appraiser then applies a discount rate rather than a capitalization rate to the earnings. This method measures the value of a medical supply company by taking the time value of money into account. Keep in mind, this method is less common since it uses future cash flow estimates which can be subjective.
Summary
Business appraisers consider many valuation approaches when valuing a medical supply company. Each method uses a different basis of valuation. To learn how to value a medical supply business, it is best to receive a business appraisal. As part of a business appraisal, a business appraiser determines the fair market value of a medical supply company. The appraiser will also discuss the strengths and weaknesses of your medical supply company. This information is vital if you are looking to maximize the value of a medical supply company.
Peak Business Valuation, business appraiser, is happy to help! We work with many medical supply companies across the country. As such, we are happy to provide you with a business appraisal for a medical supply company. In addition, Peak can discuss any questions you may have on valuing a medical supply company. Schedule a free consultation with Peak Business Valuation today!
For more information see Value Drivers for a Medical Supply Business, Valuation Multiples for a Medical Supply Company, and Valuing a Medical Supply Business.
