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Playing the Multiples Game: An Illustrative Example in Molecular Diagnostics

• Small deals trade for lower multiples; larger deals command higher valuations.

• Buying small companies and rolling them into a larger platform creates massive value through multiple arbitrage.

• Debt availability and stability drive these valuation gaps.

• Synergies in costs, revenues, and operations can amplify returns significantly.

The Power of Buy-and-Build: Unlocking Hidden Value in Molecular Diagnostics

You’ve built your molecular diagnostic lab from the ground up. You’ve seen the ups and downs, fought for every contract, and managed through every regulatory hurdle. Now, you’re thinking about scaling up—maybe buying a few smaller labs to grow faster. You’ve heard about buy-and-build strategies but wonder how it really works in your world.

It seems obvious: buy a few small labs, put them together, and sell them for a higher multiple. But as with everything in business, there’s a twist you need to understand to unlock the real value. Let’s dive in.

The Multiples Game: How Big Labs Command Big Valuations

Data from GPScout on 12,000 deals between 1996 and 2024 tells a clear story: size matters.

• Small deals (under $100M EV, think $5-10M EBITDA) trade for an average of 6.3x EBITDA.

• Large deals (over $250M EV, think >$25M EBITDA) trade at 9.1x EBITDA.

• A $25M EBITDA lab is worth 50% more than a smaller $5M lab. With the right financing, this gap could mean doubling your money.

For even smaller labs—say those with $1M EBITDA—the multiple can drop another 2 turns lower. The valuation disparity comes from two key factors: debt availability and stability.

Why Smaller Labs Trade for Less: The Hidden Risks

1. Debt Availability: Most lenders shy away from financing businesses under $15M EBITDA. Small labs struggle to access the same cheap debt available to larger players, which suppresses their valuation.

2. Stability and Risk: Smaller labs face higher volatility. A delay in payments or a loss of a key client can send EBITDA plummeting by 50%, or worse, to zero. Larger labs, with diversified client bases and services, are more stable and therefore valued higher.

How Buy-and-Build Works: Creating Value by Combining Small Labs

The buy-and-build model thrives on the premise that you can buy smaller companies cheaply, combine them, and create a more valuable entity. Here’s how it plays out:

• Buy several smaller labs with $1M EBITDA each at 5x multiples.

• Roll them into a platform with a combined EBITDA of $20M.

• This new entity can now be valued at 9-10x EBITDA, doubling the initial investment.

Simple, right? But here’s where the twist comes in. Everyone focuses on the multiple arbitrage—but that’s only part of the story. The real kicker is in how you integrate these businesses, particularly in an industry as specialized and complex as molecular diagnostics.

The Misleading Path: Focusing Solely on Cost Synergies

Let’s say you buy a few local labs. Your first instinct might be to cut costs—after all, scale means better pricing on reagents, consumables, and equipment. That’s the obvious play. You save some money on supplies, and it feels like a win.

But here’s the twist: cost synergies alone won’t get you the valuation uplift you need. They are easy to capture but often underwhelming in impact. If you’re not careful, you’ll realize too late that shaving costs isn’t enough to transform the business. You’ll end up with a slightly more efficient, but still undervalued, entity.

The Real Value Is in Revenue and Operational Synergies

The real power lies not just in saving money but in growing and stabilizing the revenue stream. Here’s how:

1. Revenue Synergies: Imagine you buy a smaller lab that specializes in oncology testing. Your existing platform already serves hospitals and clinics with infectious disease panels. By integrating the new lab, you can cross-sell oncology tests to your existing clients. This not only boosts revenue but also diversifies it—making your combined lab less reliant on any one test type or client. That’s a huge value driver.

2. Operational Synergies: Often overlooked, these are the real game-changers. For instance, implementing a unified LIMS (Laboratory Information Management System) can streamline operations, cut down reporting times, and improve accuracy. A larger lab network can also standardize testing protocols, reduce turnaround times, and increase capacity without a proportional increase in cost. These enhancements don’t just make your lab more efficient—they make it more reliable and attractive to larger customers, which stabilizes cash flows and justifies a higher multiple.

Conclusion: The Hidden Lesson in Buy-and-Build

The buy-and-build strategy isn’t just about buying low and selling high. It’s about understanding the deeper mechanics of what drives value in your industry. The twist? Cost savings alone won’t cut it—you need to demonstrate that you can drive real, sustainable growth and stability through revenue and operational synergies.

So, as you consider your next acquisition, don’t get caught in the trap of chasing quick cost savings. Focus on how each new addition can enhance your overall platform’s value proposition. That’s the real pathway to doubling—or even tripling—your money in molecular diagnostics.

Representative Deals