Medical Spa M&A: How Much Is a Med Spa Worth
In part one of a two-part Medical Spa Insider podcast series, Ben Hernandez of Skytale Group gave insight into the M&A (mergers and acquisitions) side of medical spas. In the episode, he reflected on the surge of outside financing looking to enter the aesthetics industry.
What is the current market for a medical spas? We collected Ben’s insight from the podcast here to provide a better understanding of:
- Medical spa M&A industry trends
- Why medical spas are so attractive to buyers
- How medical spas are valued
- How Skytale works with med spas through the M&A process
Listen to the full episode, or read on. We’ll share key takeaways.
Medical Spa M&A Industry Trends:
Ben shared in the episode that four years ago, the Skytale Group team sat together discussing whether or not the medical spa industry would follow the same growth patterns of the dental, pharmaceutical, and hospital industries. The answer has proven to be yes.
In Q1 of 2021, our phone began ringing off the hook. Private equity firms and financial sponsors within the aesthetic space were ready to buy. Conversations with both buyers and sellers point to a profitable path for today’s med spa and MSO owners looking to sell.
According to Market Watch, the industry expects continued growth. The global market expects to grow by $31.5 billion by 2025 with a compound annual growth rate of 13.3%. Buyers look for low-risk, high-reward industries to invest in. Your med spa can perfectly position itself for a slice of the pie.
Why are med spas so attractive to buyers?
Sellers are also increasing in number within the relatively young space. And, entrepreneurial owners are seeing opportunity for growth. Why? A single location med spa can become two, three, or ten locations and serve more patients under the same umbrella. Ultimately, a multi-location med spa business is attractive to buyers.
Dry powder is a financial term that refers to a private equity firm’s cash reserves. Although dry powder can be helpful as accessible capital, it does not generate revenue by sitting there. Firms are eager to invest dry powder for a higher return on investment. And med spas are an attractive space with high margins, limited insurance and Medicaid roadblocks, and customer payments made up front. Med spas also have the ability to consolidate and scale at an early stage. These factors create what Ben calls frothiness. Although the word also rings of financial lingo, it explains a market where prices are high.
If you are a med spa owner, now is the time to begin considering your selling strategy. The market factors are in your favor. Buyers are ready to spend.
How much value can a medical spa owner calculate for their practice?
A med spa’s value in the market depends on a few factors, including profitability, number of locations, and size of the leadership team.
If you are a med spa owner, you can gauge your market value by calculating your adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). The number is essentially your net operating income. Buyers look for easy cash flow, and your EBITDA determines your value compared to competitors.
Calculate your EBITDA by adding net income, interest, taxes, depreciation, and amortization back into your net income. More simply, EBITDA = operating profit + depreciation + amortization.
The number of locations under your med spa’s umbrella can also indicate your value to buyers. Although, there is plenty of space for single location businesses, too. The market is already ripe, and right now, investors will pay four or five times the value for a single location. However, businesses with multiple locations are seeing nine times as much value.
This is because investors are attracted to your secret sauce. Once your business opens three or four locations, it’s difficult to keep an eye on everything. Inevitably, you start building leadership layers. A med spa leadership team manages operations like budgeting, HR and recruiting, and marketing. This is attractive to buyers. There is a premium to pay for your med spa’s successful playbook.
The value we are seeing offered to med spas is comparable to that of industries like dental, ophthalmology, and optometry. For such a young market, many med spa owners are surprised by the price tag they can put on their brand. Regardless of the size of your business, there is a market for you!
How does Skytale Group prepare clients for medical spas for the M&A process?
We give our clients a simple piece of advice: run your business like you’re preparing to sell it. While many of our med spa owners are happily running their practice, we also meet two types of owners who eventually want to sell. One type dreams of growth and scalability, with an M&A several years down the road. The other type is ready to retire and sell now. We match our consulting approach to the client.
If you are a med spa owner looking to grow before you sell, our question for you is this: what is your vision? Paint us the picture in your mind of your business’ growth–how many locations, where, what services, and when you would like to sell. Our team can project what it will take to get there. What team do you need to build? How many years away is your dream? If we help you start working toward your goal immediately, you will be primed to sell when the time is right. For our relationship, this includes ongoing conversations about the med spa market and keeping an eye on the timeline.
For clients who are ready to sell now, even just a single location, Skytale will ask for preliminary information like profitability, size of team, turnover, etc. This information can be used to calculate your expected value in the market. We encourage clients whose operations may need a little tightening up to wait 9 to 12 months before going to market. We tie up loose ends and collect legal documents like contracts, leases, and finances. This will ensure you an airtight LOI from buyers when the time to sell arrives. Buyers can sense when you have your ducks in a row, and they don’t like risk. Skytale will help you eliminate risk and maximize your value.