Whether you are considering acquiring a company or follow through with an exit strategy to your well-deserved retirement, you must determine what goes into determining a lab’s valuation. The most common misconception when trying to valuate a company is looking at annual revenue. Today, business valuation is based on a multiple of adjusted EBITDA, which stands for Earning Before Interest Tax Depreciation Amortization. When using this method, you can analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.
Common EBITDA Adjustments
- Redundant Assets
- Family member on the payroll
- Personal health insurance
- Non-arm’s length revenue
- Owner’s salary/bonus
- Repairs and maintenance
- Company car
- Negative adjustments
- One-time costs
Once you have calculated EBITDA and made any necessary adjustments, the next step is determining the multiple, which is influenced by revenue synergy, margin synergy, and cost synergy.
There are a few other factors to consider before finalizing the multiple, such as:
- Whether the business you’re considering acquiring is a standard business or platform business,
- Whether or not the sellers will stay on board post-acquisition, and
- If you’re buying the business to eliminate your competition.
Below is a list of the standard due diligence that your accountants should help you with to calculate an accurate EBITDA so you can understand the factors that should be considered.
- Environmental Consultation
- Tax Consultation
- Regulatory Investigation
- Legal Overview
- HR Diligence
- Treasury Diligence
Ultimately, a business is worth what someone is willing to pay for it. Each lab must be considered on an individual basis. This blog is a great starting point if you are considering laboratory valuation, but there is much more that goes into the process that we have not discussed here. For a more in-depth look at lab valuation, check out our eBook, Demystifying Laboratory Valuation.
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