Normalizing COVID-Era EBITDA in Staffing Deals
Few industries saw earnings swing as sharply during the pandemic as healthcare staffing. Crisis bill rates, emergency contracts and extreme demand lifted results for many agencies, then faded as the market settled. That is why EBITDA in staffing deals is rarely taken at face value. Buyers and lenders typically normalize historical earnings to estimate what the agency can sustain going forward.
This guide explains how normalization works, which adjustments tend to come up and how the result can affect price and loan size. It is general information, and nothing here is legal, tax or accounting advice. Accountants and transaction advisors should prepare and review any earnings analysis for a specific deal.
Why Normalization Matters
Most acquisition prices and loan amounts are based on earnings. If a seller presents peak-year EBITDA and a buyer pays a price based on it, the buyer may end up with more debt than the business can support once earnings return to normal. Lenders generally size acquisition loans on normalized cash flow, so an unrealistic earnings figure can also mean a smaller loan than the buyer expected.
Typical Sources of Inflated Earnings
Normalization starts with identifying what was unusual. Areas buyers and lenders often examine include:
- Crisis bill rates: rates paid during surges that are well above current market pricing
- Emergency or short-term contracts: assignments that have ended and are unlikely to return
- Abnormal spread: a wide gap between bill rates and pay rates that has since narrowed
- Temporary volume: clients or service lines that were active only during the surge
- Government relief funds: one-time pandemic-era support that should not be treated as operating income
- Understated costs: recruiting, compensation or insurance expenses that have since risen
How Buyers Normalize EBITDA in Staffing Deals
There is no single formula, but the process usually involves several steps.
Step 1: Separate periods. Analysts look at results before, during and after the pandemic surge, focusing on the most recent trailing period that reflects current market conditions.
Step 2: Analyze by client and contract. Revenue and gross profit are reviewed by client, contract type and service line to see which earnings came from relationships that remain active.
Step 3: Adjust rates and spread. Where historical bill rates or spreads are above current levels, analysts may restate results using current pricing.
Step 4: Review the cost structure. Recruiter compensation, workers’ compensation, insurance and technology costs are compared to what the business will actually need going forward.
Step 5: Test add-backs. Owner compensation, personal expenses and one-time items are verified and replaced with market-rate costs where appropriate.
The result is a normalized figure, sometimes called adjusted or run-rate EBITDA, that buyers and lenders use as the basis for valuation and debt sizing. A quality of earnings review by an accounting firm can add credibility to that number.
Run-Rate Earnings and Recent Trends
Buyers often pay close attention to the direction of recent results. An agency whose earnings have stabilized at a lower but steady level may be viewed more favorably than one whose earnings are still declining. Sellers who can show stable recent months, new client wins and a healthy pipeline may have a stronger case for their normalized figure.
Buyers may also ask how the agency’s segment has performed since the surge. Segments such as allied health, specialty locum tenens or local per diem work may have held up differently from commodity travel nursing, so the mix of business can influence how much of past performance a buyer is willing to count. Lenders generally take the same view when reviewing projections.
How Normalization Affects Valuation and Financing
Because value is usually based on a multiple of earnings, a lower normalized EBITDA typically means a lower price. Our article on healthcare staffing agency valuation explains the other factors that shape that multiple.
On the financing side, lenders generally evaluate whether normalized cash flow can support the proposed debt along with a market salary for management. Our guide to SBA loans for healthcare staffing agencies explains how lenders may underwrite these deals. Every loan is subject to approval, and nothing here is a commitment to lend.
Bridging Valuation Gaps
When a seller believes in a higher figure than the buyer can support, the parties sometimes use deferred or contingent payments. Our article on earnouts in healthcare staffing acquisitions explains how that can work. Lenders and programs may limit earnouts, and seller notes are typically subordinate to the senior lender, so any structure should be discussed with the lender early.
Tips for Sellers
- Prepare a clear earnings bridge from reported to adjusted EBITDA
- Show results by client and period so buyers can see what has changed
- Document every add-back with supporting records
- Highlight relationships and contracts that continued after the surge
- Be realistic about which earnings were temporary
Tips for Buyers
- Base your offer and financing request on normalized, current earnings
- Confirm that key clients and recruiters are still in place
- Use diligence to test pricing, spread and cost assumptions
Our healthcare staffing acquisition due diligence checklist covers the broader review.
Final Thoughts
Normalizing EBITDA in staffing deals helps buyers, sellers and lenders work from the same realistic view of the business. Separating temporary pandemic-era gains from sustainable earnings can lead to a fairer price, a financeable loan and fewer surprises after closing.
US Medical Funding helps buyers finance healthcare staffing agency acquisitions based on realistic, normalized cash flow. Learn more about our healthcare staffing agency acquisition financing and our full range of healthcare staffing agency financing options.
