The valuation of companies is one of the key issues facing corporate finance applications today. In practical business, several methods of valuation compete with each other. Aside from the discounted cash flow method, the valuation of companies with multiples is one of the most common methods used (Lie & Lie, 2002, p. 44).
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The aim of this paper is, on the one hand, to give sound insight in multiple theory and, on the other hand, to value a privately held small- and medium-sized enterprise (SME) in the hospital sector using multiples.
Table of Contents
1 Introduction
1.1 Problem Definition and Objectives
1.2 Course of the Investigation
2 Conceptual Framework
2.1 Underlying Assumptions and Derivation of Multiples
2.2 Categorization of Multiples
2.3 The Approach to Multiple Valuation
3 Entity Valuation of a Medium-Sized Health Care Company
3.1 The Target Company From the Health Care Branch
3.2 Key Steps of the Multiple Valuation
3.2.1 Assessment of Value Drivers
3.2.2 Identification of Comparable Companies
3.2.3 Calculation and Evaluation of Peer Group Multiples
3.2.4 Valuation of the Target
3.3 Critical Review of the Valuation
4 Conclusion
Objectives and Topics
The primary objective of this report is to provide a comprehensive theoretical understanding of multiple valuation methods and to apply these to determine the value of a privately held small- and medium-sized enterprise (SME) in the hospital sector.
- Theoretical foundations and assumptions of multiple-based firm valuation.
- Categorization and selection of appropriate financial value drivers.
- Identification of peer groups and methodology for comparable company valuation (CCV).
- Practical valuation of a German hospital operator using synthetic peer group multiples.
- Critical analysis of the reliability and limitations of multiple valuation in complex industries.
Excerpt from the Book
3.2.1 Assessment of Value Drivers
The health care branch is a very dynamic industry and is complex based on the different national health care systems that exist (Garruto & Loud, 2001, p. 93). Thus, the selection of the right value drivers is a difficult process as “there is no obvious method to determine which measure of performance…is the most appropriate for comparison” (Kaplan & Ruback, 1995, p. 1067). In the following paragraphs we will assess value drivers based on the available financial data as well as research results on the German market. The German hospital business is cost-driven and limited through strict health care requirements. About 40% of all German hospitals are not profitable. However, for-profit hospitals run better than not-for-profit ones (Pfadenhauer, 2008, p. 63). Thus, the valuation should be centered on income statement-related figures and the operating performance, respectively.
According to Baker and Ruback (1999), the EBIT multiple showed the smallest standard deviation within a diversified health care peer group compared to sales and EBITDA multiples. Notwithstanding, the EBITDA multiple showed above-average quality compared to 21 other industry peer groups. Although the sales multiple performed worst, it deserves closer attention. As health care companies from different nations depend on different legal requirements as a results of different health care policies, the sales of a hospital facilitates an unbiased measure of a potential international peer group. Moreover, sales are least affect by accounting and tax treatments (Schreiner, 2007, p. 42). With respect to the intricate character of the hospital business, the earnings of a hospital operating company are a key measure how the firm copes with cost intensity. However, due to state-specific tax systems, using the Price-to-Earnings (P/E) multiple for an international peer group should be handled with caution. Since the target generated a solid profit in 2008 earnings should be regarded as value driver.
Summary of Chapters
1 Introduction: This chapter defines the problem of valuing non-listed companies and outlines the objective to apply multiple valuation within the health care sector.
2 Conceptual Framework: This section establishes the theoretical basis for multiple valuation, discusses the principle of arbitrage, and categorizes various market-based multiples.
3 Entity Valuation of a Medium-Sized Health Care Company: The core of the paper, detailing the practical multi-step CCV process applied to a specific target firm in the German hospital market.
4 Conclusion: A final synthesis that discusses the applicability of multiple valuation, its dependency on practitioner judgment, and the need for further academic research.
Keywords
Multiple Valuation, Comparable Company Valuation, CCV, Health Care Branch, Entity Value, Equity Value, Value Drivers, SME, Peer Group, EBITDA, EBIT, Financial Analysis, Hospital Operator, Market-based Multiples, Valuation Error.
Frequently Asked Questions
What is the core subject of this report?
The report focuses on the application of the Comparable Company Valuation (CCV) method to determine the value of a non-listed, medium-sized company in the hospital sector.
What are the central themes discussed?
Central themes include the theoretical framework of multiples, the identification of comparable companies in a complex industry, and the selection of relevant financial value drivers.
What is the primary objective of this research?
The primary goal is to provide insight into multiple theory and demonstrate how to value a privately held small- to medium-sized enterprise using market-based multiples.
Which scientific methodology is employed?
The author uses a four-step model for market-based multiple valuation, including data extraction, peer group assembly, statistical processing of multiples, and final target valuation.
What is covered in the main section of the paper?
The main section describes the practical application of the valuation process, including the assessment of value drivers, the selection of comparable firms, and the calculation and evaluation of synthetic peer group multiples.
Which keywords best characterize this work?
The work is best characterized by terms such as Multiple Valuation, Comparable Company Valuation, SME, Health Care Branch, and Peer Group analysis.
Why was the EBITDA multiple favored over other methods for the target?
EBITDA was favored because it demonstrated the lowest standard deviation among the analyzed multiples and provided a median margin that closely aligned with the target's financial performance.
How were comparable companies identified for the study?
Comparable companies were identified through financial databases like Dow Jones Factiva, Hoppenstedt Firmendatenbank, and relevant stock indices, with a focus on companies in the hospital or nursing home sectors.
What limitation does the author mention regarding the valuation of non-listed firms?
A significant limitation is the subjective nature of peer group selection and the lack of high-quality, perfectly comparable listed firms, which necessitates adjustments or the acceptance of broader peer group criteria.
- Quote paper
- Kevin Rink (Author), 2009, Multiple Valuation of non-Listed Enterprises From the Health Care Branch – Concept and Analysis, Munich, GRIN Verlag, https://www.grin.com/document/147110
