Unfavorable economic conditions and increasingly savvy investment in the autism industry have compressed earnings valuations. Still, the autism segment remains one of health care’s most desirable investment spaces.
Over the last three years, low-end and high-end multiples have been higher than a decade ago. Yet, they reflect a comedown following a deal volume and valuations spike.
Multiples ranged from 5.75 times earnings to 14 times earnings from the middle of 2016 to the middle of 2019, Dexter Braff said at the Autism Investor Summit. Braff is the president of M&A advisory firm The Braff Group.
Between 2020 and 2023, high-end multiples tumbled while low-end multiples only ticked down slightly compared to the previous period. Those multiples stand at five times to 10 times earnings. From mid-2014 to mid-2016, the typical multiples range was 3.75 to 7.75 times earnings.
Deal volumes in the autism space rose to historic highs alongside multiples. In 2019, the Braff Group tracked 46 deals, the highest annual total ever according to data tracked by the firm. During that time, a 10 times earnings multiple was a common starting point, Braff said. Autism private equity deals totaled 38 in 2022.
Despite the comedown, lower-end multiples largely remained unaffected by the headwinds that pulled high-end multiples out of the stratosphere. And many of the factors that helped push multiples high remain, leaving a positive outlook for the industry.
“If, seven years ago, you told me that the base valuation for an autism service provider with less than $5 million of revenue is [worth] five to 10 times EBITDA, I’d tell you you’re out of your mind; it’s never gonna be that high,” Braff said. “But it still is.”
Recent high-end multiples, while not as high as they once were, are “still very much higher than what we would expect in any other market segment,” Braff said.
Where is autism therapy dealmaking now?
Braff sees the space as dealing with transitional issues, especially for large operators with high-profile stumbles. The industry also is reaching a mature consolidation phase that includes expansion into other service lines.
The macroeconomic environment factors leading into the year remain. This includes workforce challenges, increased interest rates and inflation. These tamp down expectations for the performance of organizations in the future and, therefore, what they may be worth.
“So, at the end of the day, where do we stand?” Braff said. “It’s not as good as it was two years ago. It’s not a disaster.”
During the summer of 2022, several autism providers laid off staff. The highest profile example is the Plano, Texas-based applied behavior analysis (ABA) provider The Centers for Autism and Related Disorders closing 10 state markets. The venture-backed startup Elemy closed its care delivery business, laying off a major portion of its workforce and pivoting to being a platform service for independent providers.
Investors remain interested in the space as demand for services remains insatiable. Additionally, the frenzy of funding and public challenges have helped the autism therapy mergers and acquisition market mature.
Consistency of business is key to securing a higher valuation, Braff said. This can be demonstrated in several ways.
One way is to assess how a firm managed through the pandemic and where it ended afterward. This suggests resilience in the organization. Strong employee retention signals a meaningful predictor of sustaining a revenue base. Well-developed corporate teams with competent leadership demonstrate the business’ success is not dependent on the founder or owner.
Other components that increase the value of an autism company, Braff said, include a variety of payer sources and some degree of marketing or promotion to help sustain revenue.
“The issue essentially is anything that you can demonstrate that lowers the risk of the ongoing revenue and earnings stream going forward,” Braff said. “So much of that has to do now with personnel, being able to fill the positions that are being given to you.”
The outlook
Overall, dealmaking over the last five years has maintained historically high volumes. But the rate of growth of deals overall is flat.
In the first quarter of 2023, Braff tracked no platform deals, only tuck-ins. Increased interest rates and greater scrutiny of potential investor targets make investors more discerning. But there is a cyclical element to the number of platform deals.
In 2019, there were 18 autism platform deals. Braff said this is an extraordinary activity in a short amount of time. As a result, a lull or slowdown would be expected.
“Understand that in most of the sectors that have a lot of activity, there may be only 18 private equity groups with platforms at all,” Braff said.
A likely go-forward trend in dealmaking that has already compressed multiples is a more skeptical approach to assessing an autism organization’s future. While a dimmer view translates to lower multiples, it also results in more conservative definitions of earnings.
During a rosier market environment, earnings assessments take on positive, forward-looking views. During less ideal markets, there is a focus on actual previous performance and taking a more pessimistic view of the future.
While lower multiples and dimmer earnings views may translate to lower deal prices for sellers, the current deal environment establishes a new normal for the space.
And should downward trends on autism deal volumes continue, it won’t be for a lack of quality autism organizations, Braff said. It will be a result of cautious investors.
“Yes, there was a rapid run-up of deals. So, you have a little bit of a shrinkage in the pool of acquisition candidates,” Braff said. “But it’s much, much more on the buyer’s side because so many of them have just taken themselves out of buying as they’re trying to get their own house in order.”
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