by: Leif Kothe Wednesday, October 9, 2013
As I encounter new theories and projections about PERS valuations, I continue to find a refreshing lack of consensus among the experts. That’s not to say there aren’t areas of agreement. There are. Those watching the market often cite similar determinants of valuation, such as attrition rates, cash flow and the costs of creating new accounts. But experts seldom invest the same metrics with equal importance.
For example, Barry Epstein, president of Dallas-based Vertex Capital, believes reducing attrition rates to be a critical component of increasing PERS valuations. Conversely, Mark Sandler, a principal with SPP Advisors, downplayed the importance of churn, saying instead that a company’s value hinges more on how efficiently they can redeploy their units.
Today I came across a presentation on PERS valuations delivered by Henry Edmonds, president of The Edmonds Group, at the Medical Alert Monitoring Association conference held last week in Orlando. Edmonds’ insights reflect another nuanced interpretation of the market. In the presentation, he boiled PERS valuations down to four key metrics: cash flow; churn (attrition rate); growth rate/new account volume; and creation cost.
Just as vital for maximizing value is the ability of dealers to compile solid data on these metrics, Edmonds noted in one of the slides.
Edmonds developed some pretty in-depth calculations that he believes dealers should be cognizant of. For instance, churn rate metrics should account for total lost RMR on a trailing 12-month or trailing six-month basis. That figure should then be divided by average outstanding RMR. With respect to the cash flow, Edmonds advises dealers to focus on adjusted EBITDA and steady state free cash flow.
Edmonds’ presentation also offered a trove of information about buyers. He noted that buyers will create finance models for target companies, develop key assumptions based on a target company’s past performance and determine a capital structure based on current market conditions.
Edmonds also provided the following aphorism: “Buyers never pay more than they think they have to.”
In the coming weeks I plan to speak with Henry Edmonds himself to get a more in-depth take on PERS valuations and the state of the market in general. Stay tuned.