By David E. Coit, Jr., DBA, CVA, CVGA, CM&AA, CBEC, CAIM
It’s quite common for healthcare mergers and acquisitions (M&A) transactions to include either an earnout or a seller note, or in some cases both. Earnouts are an addition to the enterprise value where buyers seek protection against a potential future decline in company performance post-closing. For example, the buyer may offer the seller future payouts based on revenue growth or an increase in profitability. Seller notes also allow the buyer to offer a higher price and provide the buyer acquisition financing provided by the seller. For example, the buyer may provide the seller with a note that pays principal and interest for several years post-closing.
You might be wondering why a seller would accept either an earnout or a seller note. The answer is that both allow the buyer to offer a higher price to the seller. Earnouts and seller notes are used by buyers to offer sellers a higher price than an all-cash offer. Additionally, both earnouts and seller notes have tax advantages over the cash paid at closing.
Before we discuss the tax advantages associated with an earnout or seller note, let’s first take a look at capital gains taxes.
Capital Gains Tax Example
In a typical healthcare M&A transaction, the seller receives cash proceeds at closing, net of closing-related costs. In an equity sale, the cash received by the seller at closing is subject to federal capital gains tax and state income taxes. The capital gains tax rates for 2025 are as follows:
Tax Rates
Single Filer
Married, Filing Jointly
0%
$0 to $48,350
$0 to $96,700
15%
$48,352 to $533,400
$96,701 to $600,050
20%
$533,401 or more
$600,051 or more
A married seller, filing jointly, would pay zero federal taxes on the first $96,700 in capital gains, followed by 15% for capital gains between $96,701 and $600,050, then 20% for capital gains in excess of $600,050.
Let’s see what that looks like for $5 million in capital gains:
Capital Gains
Capital Gains
Capital Gains
Cash Proceeds
Amount to be Taxed
Federal Tax Rates
Federal Taxes
$5,000,000
$96,700
0%
$0
$503,349
15%
$75,502
$4,399,951
20%
$879,990
$5,000,000
$955,493
As such, the seller would need to pay $955,493 in federal taxes in the tax year of the sale.
Tax Advantage of Seller Note
If, however, the seller accepted $4 million at closing and a $1 million seller note that called for 12 quarterly principal payments of $83,333.33 plus interest at a rate of 7.0%, the capital gains taxes would look like this:
Capital Gains
Capital Gains
Capital Gains
Cash Proceeds
Amount to be Taxed
Federal Tax Rates
Federal Taxes
$4,000,000
$96,700
0%
$0
$503,349
15%
$75,502
$3,399,951
20%
$679,990
$4,000,000
$755,493
Year 1
Capital Gains
Capital Gains
Capital Gains
Cash Proceeds
Amount to be Taxed
Federal Tax Rates
Federal Taxes
$333,333
$96,700
0%
$0
$236,632
15%
$35,495
$333,332
$35,495
Year 2
Capital Gains
Capital Gains
Capital Gains
Cash Proceeds
Amount to be Taxed
Federal Tax Rates
Federal Taxes
$333,333
$96,700
0%
$0
$236,632
15%
$35,495
$333,332
$35,495
Year 3
Capital Gains
Capital Gains
Capital Gains
Cash Proceeds
Amount to be Taxed
Federal Tax Rates
Federal Taxes
$333,333
$96,700
0%
$0
$236,632
15%
$35,495
$333,332
$35,495
Total
$790,987
Instead of paying $955,493 in federal taxes in the tax year of the sale, the seller would pay $755,493. The seller would then pay $35,495 for each of the following three years as the principal portion of the seller note is paid to the seller, for total capital gains taxes of $790,987 (a savings of $164,506). Additionally, the seller would earn $113,750 in interest income that would be taxed as ordinary income.
Tax Advantage of Earnout
The tax advantage of an earnout looks similar to the seller note example above, but it would not include interest income. The difference between seller note capital gains taxes on the principal payments and the earnout proceeds is that sellers don’t always know in advance the amount of the earnout proceeds. For example, a buyer might offer the seller an earnout based on a percentage of incremental revenues for three years post-closing. Neither the seller nor the buyer will know the amount of annual revenue for each of the post-closing three years until the year ends.
Both the seller note and earnout provide the seller with a tax deferral and lower overall capital gains taxes. However, that assumes federal tax rates remain the same in future years.
Sellers must also take into consideration that there is a risk that the seller may not be able or willing to pay principal and interest on the seller's note or that the future performance of the company does not meet the earnout hurdles.
Understanding the Tax Advantages of Seller Notes and Earnouts
I hope this column has provided you with greater insight into the potential tax advantages of seller notes and earnouts. Knowing the potential tax advantages allows sellers to make more informed decisions regarding accepting a seller note or earnout.
Please note that most states tax capital gains as regular income. A seller note and earnout still provide the seller with a tax deferral, which may offer tax advantages for state income tax purposes depending on the overall taxable income of the seller post-closing. Most sellers expect lower amounts of regular income after they sell their business.
Although this column illustrates the potential tax savings of seller notes and earnouts, readers should always seek the advice of a tax professional like a CPA before making a decision on such matters.
Curious about what you should expect regarding the after-tax proceeds for the sale of your healthcare company? Request a market valuation of your business from VERTESS — regardless of whether you're considering selling soon. Knowing the current market valuation can provide insight you can use to better determine the go-forward plan for your company.
A good roadmap begins by knowing where you are today. A market valuation of your healthcare business is a great start to planning for your future.
David E. Coit, Jr., DBA, CVA, CVGA, CM&AA, CBEC, CAIM
I am a seasoned commercial and corporate finance professional with over 30 years of experience. As part of the VERTESS team, I provide clients with valuation, financial analysis, and consulting support. I have completed over 400 business valuations. Most of the valuation work I do at VERTESS is for healthcare companies such as behavioral healthcare, home healthcare, hospice care, substance use disorder treatment providers, physical therapy, physician practices, durable medical equipment companies, outpatient surgical centers, dental offices, and home sleep testing providers.
I hold certifications as a Certified Valuation Analyst (CVA), issued by the National Association of Certified Valuators and Analysts, Certified Value Growth Advisor (CVGA), issued by Corporate Value Metrics, Certified Merger & Acquisition Advisor (CM&AA), issued by the Alliance of Merger & Acquisition Advisors, and Certified Business Exit Consultant (CBEC), issued by Pinnacle Equity Solutions, and Certified Acquisition Integration Manager (CAIM), issued by Intista. Moreover, the topic of my doctoral dissertation was business valuation.
I earned a Doctorate in Business Administration from Walden University with a specialization in Corporate Finance (4.0 GPA), an MBA from Keller Graduate School of Management, and a BS in Economics from Northern Illinois University. I am a member of the Golden Key International Honor Society and Delta Mu Delta Honor Society.
Before joining VERTESS, I spent approximately 20 years in commercial finance, having worked in senior-level management positions at two Fortune 500 companies. During my commercial finance career, I analyzed the financial condition of thousands of companies and successfully sold over $2 billion in corporate debt to institutional buyers.
I am a former adjunct professor with 15 years of experience teaching corporate finance, securities analysis, business economics, and business planning to MBA candidates at two nationally recognized universities.
By: David E. Coit, Jr., DBA, CVA, CVGA, CM&AA, CBEC, CAIM
Ambulatory surgery centers (ASCs) are a hot commodity, attracting increased interest from hospital and health systems, surgical facility operators (e.g., Surgery Partners, SCA Health), private equity firms, and commercial payers. Given this increased interest from strategic and financial buyers, it's not surprising that we are hearing from a growing number of ASC owners wondering about the value of their facilities.
Before we dive into the factors influencing ASC value and discuss surgery center valuations, it's helpful to get a lay of the ASC land. The massive changes in ASC scale and scope in recent years continue to propel growth but also bring challenges. A larger number of ASCs are performing a broader set of procedures than ever, including the likes of total joint replacements and a variety of cardiovascular treatments, but labor shortages, inflation, and reimbursement pressures are hurting their ability to increase profitability.
Outpatient care will continue shifting away from inpatient (e.g., hospital) settings toward ASCs. Evolving medical and technology advances will further accelerate the transition as patients seek safe, affordable care and payers look to reel in rising healthcare costs. The rise in the number of ASCs to the point where the number of Medicare-certified surgery centers (~6,400) has surpassed the number of hospitals (~6,100) is in part due to the significant cost savings of procedures performed in ASCs compared to onsite hospital surgeries, which allows for lower reimbursement rates and patient expenses. The migration of care into ASCs, fueled by payer pressures, is one the reasons many hospitals are seeking to develop or partner with ASCs. Consulting firm Avanza Healthcare Strategies notes that more than 7 out of 10 hospitals and health systems intend to continue investing in and affiliating with ASCs. The trend is up 8% since 2019, with the firm attributing the shift to many factors, including consumer demand and the need to decrease costs. Physicians remain interested in starting ASCs or becoming minority or majority owners to allow them to obtain distributions.
Key ASC Risk Drivers
Similar to most investable assets, the value of ASCs is a function of risks versus rewards. Key risk drivers include:
Location: Being located in a certificate of need (CON) state and/or being located near key suppliers, solid referral sources, ample labor supply, low concentration of other ASCs, and good patient demographics are all positives.
Payers: Having low reliance on out-of-network payers is preferable.
Reimbursement: Having low dependence on procedures with low reimbursement rates helps reduce risk.
Operational dependence: Having high reliance on one physician, one referral source, or one senior executive who would cause a dramatic decline in revenue if they were to leave the ASC raises risk.
Non-competition/non-solicitation agreements: Having little concern that employees or independent contractors would leave the ASC and immediately become a competitor or would steal away key employees reduces risk.
Multi-specialty vs. single-specialty ASCs: Multi-specialty ASCs that have a low concentration of services/procedures provided relative to total revenue are considered less risky than single-specialty ASCs.
Other issues impacting the riskiness of a particular ASC include:
Performance: The overall performance of an ASC relative to its peers/competitors. An ASC that historically underperforms its peers will be viewed as more risky than one that at least performs as well as like facilities.
Historical legal issues: Legal fees will impact valuations via lower profitability, while a history of numerous legal issues will increase buyers' perception of riskiness.
Turnover: An ASC with relatively high employee, patient, and/or referral source turnover will be looked at as more risky than otherwise.
Collections issues: An ASC with a history of billing/collections issues, high reimbursement denials, longer than normal collection periods, and higher than normal write-offs for uncollectable accounts receiable (A/R) will be deemed riskier than normal.
Malpractice claims history: An ASC with numerous malpractice claims may lead buyers to increase their perception of riskiness.
Patient readmissions: An ASC with an above-average hospital readmission rate will increase buyers' perception of riskiness.
Compliance: An ASC with a history of regulatory compliance, accreditation, and/or licensure issues will be deemed more risky.
Some people might argue that the above-listed risk drivers are qualitative matters rather than quantitative. In reality, these risk drivers ultimately impact overall performance and are therefore quantitative relative to creating cash flow for the owners/investors of the ASC.
Relative size also matters regarding the market value of ASCs. There is higher demand by buyers for ASCs with higher revenue and organizations with multiple locations. Higher demand will lead to higher valuations.
Current ASC Valuations
Let's discuss ASC valuations. Below is a breakdown of the current estimated market values based on multiples of earnings before interest expense, income taxes, depreciation, and amortization (EBITDA) of ASCs by size and perceived riskiness:
Market Valuation*
Annual Revenue<$15 million$15 to $30 million>$30 million
Low-risk ASCs 4.0x to 4.5x 4.5x to 6.0x 6.0x to 8.0x
Moderate-risk ASCs 3.5x to 4.0x 4.0x to 5.5x 5.5x to 7.5x
High-hisk ASCs 2.5x to 3.5x 3.0x to 4.0x 5.0x to 5.5x
For example, a low-risk ASC with $9.0 million in annual revenue and an EBITDA of $1.8 million (20.0% EBITDA margin) will have a market value in the range of $8.1 million to $10.8 million.
*Actual market value is also a function of (1) quality of offering memorandum and reporting, (2) quality of intermediary representation, (3) historical performance of the company, (4) future growth prospects of the company, (5) quality, type, and number of potential buyers, (6) current and projected macroeconomy, (7) current and projected industry stability and growth, (8) and numerous other factors.
Note that acquisitions of ASCs are typically stock purchases, as opposed to asset purchases, and are done on a cash-free/debt-free basis. The seller(s) normally distribute their cash balances before closing the sale/purchase and after paying off all indebtedness.
Buyers typically undertake a Quality of Earnings (QoE) analysis. A QoE is a comprehensive examination of a company's financial performance, detailed revenue analysis, review of accounting policies, assessment of company management, examination of company operations, and reliability of financial reporting. We often recommend that ASC owners undertake a seller's QoE before going to market. By doing so, owners can take steps to mitigate issues uncovered during the QoE process, thereby reducing perceived riskiness.
Moreover, the QoE process helps sellers and their mergers and acquisitions (M&A) advisor to better identify discretionary and non-recurring expenses that are add-backs to EBITDA to best reflect the cash flows generated by the ASC to potential buyers.
What Is Your ASC Worth? Receive a Market Valuation From VERTESS. Whether or not you're considering selling your ASC, knowing the current market valuation can provide you insight into deciding where to go. You might be trying to determine where you want your ASC to be five years from now. A good roadmap begins by knowing where you stand today. A market valuation of your ASC is a great start to knowing where you are now.
As a healthcare-focused M&A firm, we at VERTESS help owners understand the expected value of their business if they are to bring their company to market. We'd be more than happy to provide you with a current market valuation of your ASC.
David Coit DBA, CVA, CVGA, CM&AA, CBEC, CAIM
I am a seasoned commercial and corporate finance professional with over 30 years of experience. As part of the VERTESS team, I provide clients with valuation, financial analysis, and consulting support. I have completed over 400 business valuations. Most of the valuation work I do at VERTESS is for healthcare companies such as behavioral healthcare, home healthcare, hospice care, substance use disorder treatment providers, physical therapy, physician practices, durable medical equipment companies, outpatient surgical centers, dental offices, and home sleep testing providers.
I hold certifications as a Certified Valuation Analyst (CVA), issued by the National Association of Certified Valuators and Analysts, Certified Value Growth Advisor (CVGA), issued by Corporate Value Metrics, Certified Merger & Acquisition Advisor (CM&AA), issued by the Alliance of Merger & Acquisition Advisors, and Certified Business Exit Consultant (CBEC), issued by Pinnacle Equity Solutions, and Certified Acquisition Integration Manager (CAIM), issued by Intista. Moreover, the topic of my doctoral dissertation was business valuation.
I earned a Doctorate in Business Administration from Walden University with a specialization in Corporate Finance (4.0 GPA), an MBA from Keller Graduate School of Management, and a BS in Economics from Northern Illinois University. I am a member of the Golden Key International Honor Society and Delta Mu Delta Honor Society.
Before joining VERTESS, I spent approximately 20 years in commercial finance, having worked in senior-level management positions at two Fortune 500 companies. During my commercial finance career, I analyzed the financial condition of thousands of companies and successfully sold over $2 billion in corporate debt to institutional buyers.
I am a former adjunct professor with 15 years of experience teaching corporate finance, securities analysis, business economics, and business planning to MBA candidates at two nationally recognized universities.
We can help you with more information on this and related topics. Contact us today!
By: David E. Coit, Jr., DBA, CVA, CVGA, CM&AA, CBEC, CAIM
Why should a buyer's costs of integrating an acquired company be of interest to the seller? The most important reason is that sellers often pay part or all the integration costs of the buyer. According to McKinsey & Co., the average cost of integration is between 15% and 20% of an acquisition's purchase price.
How do buyers' integration costs become a concern for sellers? Buyers typically determine the offering price based on expected future cash flows received from the acquired company. When buyers estimate future cash flows, they often include the anticipated costs of integrating the acquired company. Thus, the purchase price is often net of the buyer's expected integration costs.
If you're considering a sale of your healthcare company, you might be wondering: What can I do to influence the buyer's cost of integration?
That's a great question! There are several actions sellers can take before going to market that can reduce the buyer's integration costs. Moreover, those cost savings may allow potential buyers to increase their offering price because of a perceived increase in first-year cash flows from the acquisition.
How to Cut Healthcare Acquisition Integration Costs
Let's discuss eight areas where sellers may want to take steps before selling their company that can reduce a buyer's integration costs and potentially increase offers and the final sale price.
1. IT software applications
Buyers typically migrate the information technology (IT) used by an acquired company to match the applications the buyer uses. Software migration can be a costly and time-consuming process, especially if the seller is using legacy systems and outdated technology, in-house developed software, and/or has inaccurate or incomplete data. On the other hand, using widely used, industry-specific applications and having clean and current data will considerably ease the migration process.
In addition, providing buyers with a listing of IT applications used, the methodology of data collection and data verification, and a scheduled IT software maintenance program will allow buyers to better determine the estimated time and expense of IT integration.
2. Repair and maintenance
Believe it or not, some sellers defer routine repair and maintenance in the months leading up to the sale of their business. While this may seem like a good way to increase the seller's cash flow before selling their business, buyers will likely discover such deferred expenses during due diligence and predictably take a dim view of such actions. Moreover, buyers will estimate their costs of remedying or mitigating the deferral.
It's better to keep up with scheduled repairs and maintenance as though the business wasn't being sold than having buyers decrease their offering price to account for these necessary expenses. However, sellers should not needlessly incur excess repair and maintenance costs before going to market. Keep in mind that companies sell for a multiple of cash flow. As such, every dollar increase in cash flow returns a greater dollar amount in the price of the company.
3. Turnover
Buyers usually expect a post-acquisition drop in the acquired companies' revenue due to employee turnover, client/patient turnover, or referral source turnover. A key aspect of integration is the retention of essential employees, clients/patients, or referral sources.
If the seller can show buyers that they've taken and will continue to take actions to mitigate turnover, buyers will be less concerned about revenue loss and the associated costs of retention. In addition, sellers who demonstrate a commitment to work after the sale to address possible retention issues show good faith to prospective buyers.
4. Capital expenditures
Buyers often expect that sellers have underinvested in capital expenditures (Capex) leading up to the sale of their healthcare businesses. Appropriate investment versus underinvestment is a difficult issue to address. On the one hand, replacing older equipment does not necessarily increase the offering price from buyers. On the other hand, buyers may adjust their offering price after due diligence once they've determined the estimated costs associated with underinvestment.
A good rule of thumb is to continue Capex dollars based on historical needs. In other words, consider keeping up with maintenance Capex but limit the amount spent on long-term growth Capex. The most typical underinvestment in Capex is new computers for employees. Beware of acquiring new computers that may not meet the buyer's IT specifications. In other words, be smart and frugal with CapEx dollars before going to market.
5. Facilities
Before interacting with potential buyers, a seller won't know the facility needs of buyers. Many buyers don't want to own real estate. Others may have operations with excess capacity near the seller's location(s).
Perhaps the best way to address the issue of facilities is (1) the seller should not undertake any leasehold improvements before going to market, (2) sellers should avoid long-term lease extensions or related commitments, and (3) if the facility(ies) is/are owned, consider looking into alternative options should the buyer chose not to acquire real estate. Sellers don't want to be in a position where the buyer decreases the offering price because the seller needs to unwind facility(ies) commitments.
6. Open staff positions
It's commonplace for sellers to avoid filling open staff positions before selling their business. Such situations can be a two-edged sword. The buyer will discover unfilled positions during due diligence and factor in the cost of filling the positions by repricing their offer. On the other hand, the seller may be able to fill open positions at a wage rate or salary lower than the buyer's estimated compensation. Conversely, the buyer may be able to fill certain open positions where the buyer has existing staff to fill open positions.
I recommend the seller discuss this matter with their healthcare M+A advisor or potential buyers before the buyers make an offer to acquire the business. One other consideration is the potential to outsource open positions with independent contractors. For example, contracting with a fractional chief financial officer rather than hiring a full-time CFO.
7. Contracts, licensing, certifications, and subscriptions
Buyers will discover any past-due, expired, or soon-to-expire contracts, licensing, certifications, or subscriptions (CLCS). Sellers should keep essential CLCS' up to date. However, before going to market, sellers should evaluate each CLCS to determine the value of reviewing or extending the CLCS. For example, older certifications may be of little value because of changes in the industry. Similarly, certain subscriptions may not be of value to buyers and thus an unnecessary waste of funds.
For example, some physicians elect to be members of various associations like the American Medical Association, Medical Group Management Association, and/or state medical societies. If these CLCS do not drive revenue or business value, consider not renewing the CLCS.
8. Accounting/financial reporting
We regularly advise our clients whose financial reporting is on a cash basis to convert to an accrual basis before going to market. Accrual basis accounting is a more accurate method of financial reporting than cash basis accounting. We also recommend that their accrual basis accounting conform with generally accepted accounting principles (GAAP).
One way to ensure that a company's financial statements are GAAP compliant is to have a CPA firm perform an audit. Audited financial statements can provide buyers with confidence in the reliability of the financial reporting.
An alternative to having audited financial statements is to have an accounting firm prepare a seller's quality of earnings (QofE) examination. A QofE is an assessment of a company's performance that removes anomalies and poor accounting or bookkeeping methodologies, and more accurately reports a company's true performance.
Many buyers will undertake a QofE as part of their due diligence process. When sellers provide buyers with a seller's QofE report, as my colleague Bradley Smith discussed in this column, buyers gain confidence in the accuracy of the seller's financial reporting.
Moreover, buyers may either accept the seller's QofE rather than having a third party perform a QofE or hire a CPA firm to review the seller's QofE report. In either case, the buyer saves time and money and will be able to quickly determine the riskiness of the seller's company.
Impact on a Potential Healthcare Acquisition
Imagine you are looking at acquiring one of two healthcare companies in your industry. One of the companies uses similar IT software applications as you; keeps current on routine repairs and maintenance; has a sound record of low employee turnover; has no underinvestment in Capex; has the option to renew their facility's lease (which is now month-to-month); has no unfilled staff positions; is current with all contracts, licensing, and certifications; only has necessary subscriptions; and has accurate and verified financial reporting.
The other company is using proprietary or in-house developed IT software applications, is significantly delinquent in routine repair and maintenance; has higher than usual employee turnover; is underinvested in Capex; has a long-term facility lease contract on an undesirable property; has several unfilled open staff positions; is past-due on renewing contracts, licensing, and certifications; has many unnecessary contractual subscriptions; and has numerous accounting errors in their cash basis financial statements. Which company would you be willing to offer a higher purchase price? Which company would you perceive as a risky investment? Which company would you expect to spend less money on during integration?
It's easy to see how putting in some work to reduce acquisition integration costs can lead to more offers and higher offers while increasing the likelihood of a successful sale. If you are thinking about selling your healthcare company and would like to discuss ways to decrease acquisition integration costs and make your business more appealing to prospective buyers, reach out to me or any other member of the VERTESS team. We would welcome the opportunity to speak with you!
David Coit DBA, CVA, CVGA, CM&AA, CBEC, CAIM
I am a seasoned commercial and corporate finance professional with over 30 years of experience. As part of the VERTESS team, I provide clients with valuation, financial analysis, and consulting support. I have completed over 400 business valuations. Most of the valuation work I do at VERTESS is for healthcare companies such as behavioral healthcare, home healthcare, hospice care, substance use disorder treatment providers, physical therapy, physician practices, durable medical equipment companies, outpatient surgical centers, dental offices, and home sleep testing providers.
I hold certifications as a Certified Valuation Analyst (CVA), issued by the National Association of Certified Valuators and Analysts, Certified Value Growth Advisor (CVGA), issued by Corporate Value Metrics, Certified Merger & Acquisition Advisor (CM&AA), issued by the Alliance of Merger & Acquisition Advisors, and Certified Business Exit Consultant (CBEC), issued by Pinnacle Equity Solutions, and Certified Acquisition Integration Manager (CAIM), issued by Intista. Moreover, the topic of my doctoral dissertation was business valuation.
I earned a Doctorate in Business Administration from Walden University with a specialization in Corporate Finance (4.0 GPA), an MBA from Keller Graduate School of Management, and a BS in Economics from Northern Illinois University. I am a member of the Golden Key International Honor Society and Delta Mu Delta Honor Society.
Before joining VERTESS, I spent approximately 20 years in commercial finance, having worked in senior-level management positions at two Fortune 500 companies. During my commercial finance career, I analyzed the financial condition of thousands of companies and successfully sold over $2 billion in corporate debt to institutional buyers.
I am a former adjunct professor with 15 years of experience teaching corporate finance, securities analysis, business economics, and business planning to MBA candidates at two nationally recognized universities.
We can help you with more information on this and related topics. Contact us today!
Owners of healthcare companies are accustomed to creating financial value for their businesses by focusing on the traditional areas of scope of services, client/patient capacity, and revenue streams via reimbursement yield and patient volume.
While revenue growth and operational efficiency are key value drivers for a healthcare company, neither addresses a critical value factor known as company-specific risk (CSR). CSR, also referred to as unsystematic risk, can be understood as risk unique to a company or industry. Differences in CSR are one of the most significant reasons some healthcare firms get top dollar when sold, while others receive a fraction of their potential sale price.
Let's look at five ways healthcare business owners can increase their financial value by decreasing their CSR.
1. Create a fully developed, written business plan
Few small to medium-sized healthcare businesses create a business plan once they are no longer early-stage companies. Instead, they tend to rely on an informal, ad-hoc approach to planning that relies extensively, if not exclusively, on the activities of the business owner(s).
Taking the time to develop a written business plan at various stages of a company's history provides owners and employees the ability to discuss and create a roadmap that supports the owners' business strategy. A detailed business plan also decreases CSR by addressing issues such as:
Where is the business headed?
How will we get the business there?
How much will it cost us to get the business there?
What are competitors doing to keep us from getting there?
2. Establish an independent and engaged board of directors
Since most healthcare company owners are healthcare professionals who have learned how to be businesspeople through trial and error, they are often not accustomed to seeking advice from seasoned business professionals. That explains why some healthcare business owners believe that assembling a board or directors or advisory board will diminish their independence. However, board members can deliver significant value to business owners by sharing competitive insight, acting as a sounding board for new ideas, enhancing access to growth capital, strengthening company credibility, suggesting alliances, and more.
Company boards reduce CSR by providing strategy guidance, thought leadership, and hands-on experience. Viable businesses often have the support of a group of seasoned business professionals who have a genuine interest in the success of the company.
3. Develop a sustainable corporate culture
Many small to medium-sized healthcare companies have a corporate culture that mirrors the personality of the owner(s). As such, the culture may not be well-suited to capitalize on growth opportunities and may not foster a collaborative environment among disciplines and employees. Moreover, the culture may not actively and effectively develop future leaders throughout the company.
Effective corporate cultures help energize employees, attract new clients, improve the effectiveness of managers, and enhance company reputation. Developing a sustainable corporate culture reduces CSR by lessening the impact of high employee turnover, decreasing unethical behavior, and increasing positive employee interactions.
4. Set up an experienced and focused sales team
Few small to medium-sized healthcare companies have dedicated sales professionals on staff. Instead, they rely on generating business through the likes of referrals and company websites. While these are important for a company's growth, the addition of quality salespeople can be a difference maker. The right sales team can solidify relationships with patients/clients, gather critical feedback regarding the company's performance, and gauge and help a business respond to market trends. A quality sales team can reduce CSR by creating a pipeline of new patients/clients, reducing patient/client concentration, and enhancing barriers to competitive threats.
Why don't many small to medium-sized healthcare companies establish an experienced and focused sales team? Some healthcare providers are under the impression that governmental regulators frown on these kinds of activities. Others believe sales efforts are unprofessional in healthcare. Both perspectives are misguided. Larger healthcare companies almost always have a professional sales staff, which can make it difficult for smaller firms without a sales team of their own to remain competitive.
5. Create and adopt a marketing plan
A well-written marketing plan includes the duties and responsibilities of the marketing person or team, a detailed assessment of the target market, competitive analyses, and brand development, among other topics. A fully developed and adopted marketing plan helps reduce CSR by establishing and sharing knowledge of the company's target market and tactical plans to expand market share. Moreover, a marketing plan establishes a foundation for delivering the desired patient/client experience.
Some healthcare company owners believe that when a marketing plan is created, it will eventually collect dust on the shelf and never be reopened. What they fail to realize is that a functional marketing plan is never finalized. The plan should be treated as a living document that changes as the market environment and the company changes. The plan should also be regularly revisited, evaluated, and updated based upon factors including the success of marketing campaigns, identification of new marketing opportunities, and marketing efforts by competitors.
Learning the Value of Your Healthcare Company
Understanding CSR factors and how to mitigate them can significantly increase company value. To gain a better understanding of your CSR factors, learn about the value of your company, and find out ways you can potentially strengthen the value and performance of your healthcare business, reach out to me or any other member of the VERTESS team. We're help to help!
David Coit DBA, CVA, CVGA, CM&AA, CBEC, CAIM
I am a seasoned commercial and corporate finance professional with over 30 years of experience. As part of the VERTESS team, I provide clients with valuation, financial analysis, and consulting support. I have completed over 400 business valuations. Most of the valuation work I do at VERTESS is for healthcare companies such as behavioral healthcare, home healthcare, hospice care, substance use disorder treatment providers, physical therapy, physician practices, durable medical equipment companies, outpatient surgical centers, dental offices, and home sleep testing providers.
I hold certifications as a Certified Valuation Analyst (CVA), issued by the National Association of Certified Valuators and Analysts, Certified Value Growth Advisor (CVGA), issued by Corporate Value Metrics, Certified Merger & Acquisition Advisor (CM&AA), issued by the Alliance of Merger & Acquisition Advisors, and Certified Business Exit Consultant (CBEC), issued by Pinnacle Equity Solutions, and Certified Acquisition Integration Manager (CAIM), issued by Intista. Moreover, the topic of my doctoral dissertation was business valuation.
I earned a Doctorate in Business Administration from Walden University with a specialization in Corporate Finance (4.0 GPA), an MBA from Keller Graduate School of Management, and a BS in Economics from Northern Illinois University. I am a member of the Golden Key International Honor Society and Delta Mu Delta Honor Society.
Before joining VERTESS, I spent approximately 20 years in commercial finance, having worked in senior-level management positions at two Fortune 500 companies. During my commercial finance career, I analyzed the financial condition of thousands of companies and successfully sold over $2 billion in corporate debt to institutional buyers.
I am a former adjunct professor with 15 years of experience teaching corporate finance, securities analysis, business economics, and business planning to MBA candidates at two nationally recognized universities.
We can help you with more information on this and related topics. Contact us today!
by David E. Coit, Jr., DBA, CVA, CVGA, CM&AA, CBEC
After spending many years building your healthcare company, it's increasingly likely that you will find yourself thinking about the prospects of selling it. Whether you have a formalized exit strategy or are taking a "seat-of-the-pants" approach to preparing for sale, you must be able to view your company from a buyer's perspective.
More specifically, you will want to understand the key "value drivers" of your company. These are the qualities prospective buyers are most interested in seeing and learning about. To gain a better understanding of how your company is performing — specifically concerning these value drivers — buyers will typically ask you the following questions:
Does your company have a history of consistent growth?
Is your company part of a growing sector?
Are you increasing your share of the market?
Have you created barriers to competition?
Are any of your customers/patients contractually committed?
Are any of your products or services unique, and do they provide you with a competitive advantage?
Do you have a recognizable brand?
Is your company innovative?
Are you utilizing state-of-the-art technologies?
Do you enjoy net margins greater than the industry average?
Do you have a diversified customer/patient base?
Do you have a diversified payer mix?
Are you using best practices for accounting and financial matters?
Is your company sustainable without you?
Are your products or services delivered in a systematic and process-driven manner?
Do you track key measures of customer/patient satisfaction?
Do you have a skilled leadership team that succeeds in meeting or exceeding your goals and objectives?
Can your company attract, develop, and retain quality employees?
Are all your company's legal matters in order?
If you find it difficult to confidently answer these questions, your company might not be ready to sell, or at least not sell at a price you desire (To gain a better understanding of whether your company is likely to sell, I encourage you to read my column, "How to Determine the Probability of Closing a Healthcare Transaction"). The good news is that holes in your operations that may stand in the way of a successful transaction are usually fixable.
Preparing your company/practice for sale may require the following steps:
Financial statements: Ensure your financial statements are accurate and up to date. This includes balance sheets, income statements, and cash flow statements.
Document processes: Clearly document all operational processes. This can make the transition smoother for the buyer.
Legal compliance: Ensure your business is compliant with all relevant laws and regulations.
Market analysis: Understand your market position, including strengths, weaknesses, opportunities, and threats,
Self-due diligence: Conduct a thorough internal due diligence process to identify and address any potential issues before they are discovered by a buyer.
M+A and legal: Engage experienced healthcare M+A and legal advisors to guide you through the selling process.
Deal structure: Determine the preferred deal structure (e.g., asset sale vs. stock sale) and negotiation terms.
Contingency planning: Anticipate potential issues and have contingency plans in place.
Tax advisors: Consult with tax advisors to optimize the tax efficiency of the transaction.
Timing: Consider market conditions and the economic environment when deciding the timing of the sale.
Customer relationships: Strengthen customer relationships to enhance the perceived value of the business.
If you intend to sell your company in the near or at least the not-so-distant future, don't delay. The healthcare M+A market is very active, and this activity is expected to continue in 2024. Buyers are eagerly acquiring healthcare companies that create investor/buyer value. Company owners only have one opportunity to make a first impression on buyers. Will your first impression lead to a successful sale at the price you want for your company, or will it leave you with long-term regrets?
The work you put in today can significantly influence the reward you earn tomorrow. That work will likely be easier and that reward increased by partnering with a healthcare M+A advisor, such as one from our team at VERTESS. Learn what we can do for you and your healthcare company by reaching out using my contact information below.
David E. Coit, Jr., Director of Finance + Valuation / Partner
David is a seasoned commercial and corporate finance professional with over 30 years’ experience. As part of the VERTESS team, he provides clients with valuation, financial analysis, and consulting support. He has completed over 150 business valuations. Most of the valuation work he does at VERTESS is for healthcare companies such as behavioral healthcare, home healthcare, hospice care, substance use disorder treatment providers, physical therapy, physician practices, durable medical equipment companies, outpatient surgical centers, dental offices, and home sleep testing providers.
David holds certifications as a Certified Valuation Analyst (CVA), issued by the National Association of Certified Valuators and Analysts, Certified Value Growth Advisor (CVGA), issued by Corporate Value Metrics, Certified Merger & Acquisition Advisor (CM&AA), issued by the Alliance of Merger & Acquisition Advisors, and Certified Business Exit Consultant (CBEC), issued by Pinnacle Equity Solutions. Moreover, the topic of his doctoral dissertation was business valuation.
David earned a Doctorate in Business Administration from Walden University with a specialization in Corporate Finance (4.0 GPA), an MBA from Keller Graduate School of Management, and a BS in Economics from Northern Illinois University. He is a member of the Golden Key International Honor Society and Delta Mu Delta Honor Society.
Before joining Vertess, David spent approximately 20 years in commercial finance, having worked in senior-level management positions at two Fortune 500 companies. During his commercial finance career, he analyzed the financial condition of thousands of companies and had successfully sold over $2 billion in corporate debt to institutional buyers.
He is a former adjunct professor with 15 years' experience teaching corporate finance, securities analysis, business economics, and business planning to MBA candidates at two nationally recognized universities.
Numerous books, articles, webinars, and other media provide detailed exit planning strategies for healthcare business owners. This article aims to provide owners with a concise primer on key actions to take and essential questions to answer that can help better prepare themselves and their healthcare businesses for an eventual exit.
Critical Steps for Exit Planning
Generally, exit planning encourages healthcare business owners to do the following:
Determine the readiness of the business and the owner(s) to exit
Attempt to maximize business value by identifying key value drivers and acting upon them
Develop a plan to exit the business with the business continuing through new ownership and with sufficient resources to achieve goals and objectives
Ensure the business maintains financial, civic, or other objectives
Allow the business owner to fulfill their goals as closely as possible by realizing desired exit objectives
Let's first discuss the transferability of your healthcare business. To improve transferability for an exit, owners should take steps to ensure that:
Key employees will remain with the company after you leave
All customer relationships remain intact post-sale
Operating processes and technology can be passed on to the buyer
Your replacement can readily step into your shoes
Your proprietary intellectual property is adequately secured via trademarks, patents, licenses, etc.
In short, you need to be able to answer yes to the question confidently: Can the business run without you being there?
Key Value Drivers for Healthcare Businesses
The value of a business is a function of risk versus reward in the eyes of buyers. As such, lowering perceived risks and increasing business cash flow increases the value of a business.
Let's look at a few key value drivers and questions owners should ask themselves in determining how buyers will view the value of their business.
Financial Performance
How does your profitability compare to industry averages?
What is your revenue trend line? Does your revenue growth match or exceed the industry average?
What is the relative quality of your assets?
Do you have clean books and regularly produce reliable, easy-to-read financial statements?
Do you frequently rely on internally prepared financial statements in making decisions?
Process and Systems
Are your internal processes consistent?
Are your processes easily teachable and repeatable?
Do you have systems in place to continuously focuses your team on maximizing the value of the business?
Do you measure the performance of your internal processes?
Do you periodically review/amend your processes to address vulnerabilities and achieve additional efficiencies?
Do you attempt to automate processes when possible?
Organizational Strength
Do you delegate authority/responsibilities when possible?
Can you and your employees readily state the strengths of the business?
Are those the right strengths for the continuity of the business?
Is the supervisor's span of control optimal (i.e., number of subordinates per supervisor)?
Do your supervisors have the needed skills to lead others?
Do you have the right people in the right roles?
Are you able to attract quality employees and retain them?
Business Dependency
Do just a few customers make up most of your revenues?
Are you, the business owner, dependent?
Are you dependent on a few key suppliers?
Is your company's success tied to one rainmaker employee?
Is your business dependent on scarce technology?
Are company revenues dependent on a few key referral sources?
Revenue Profile
Do you have recurring revenues?
Are revenues growing year over year?
Do you face constraints to continued revenue growth?
Are your historical revenues like a rollercoaster?
Do you have a diverse payor mix?
Do you have competitive advantages that support revenue and growth?
Market Conditions
Aside from COVID-19, are there any known headwinds that could affect your business?
Are there any new technologies that could impact your business?
Are your local demographics favorable for growth?
Is the overall economic outlook favorable for your business?
Is your business somewhat recession-proof?
Growth Potential
How scalable is your business?
Can you increase growth through innovation?
Are you able to add additional products or services to increase growth?
Are you able to react quickly to new market opportunities?
Are there untapped payors that could lead to increased revenue?
Depending on your exit time horizon, you may be able to impact all the above listed value drivers positively. If so, you're on your way to maximizing your business's value while simultaneously reducing the riskiness of your business.
Exit planning and executing the plan can be a heavy lift, especially for owners fully engaged in the day-to-day operations of their businesses. Most small businesses will not be sold but rather be liquidated after the owner decides to retire should motivate owners to plan their exit better. I once heard an exit planning consultant exclaim that "exit planning is hard work because it's worth it."
Whether you're ready to exit your business now or plan to in the future, please consider containing one of the other Vertess Healthcare Advisors or me to discuss an exit plan.
By David Coit, DBA, CVA, CVGA, CM&AA
Volume 9, Issue 10, May 17, 2022
The ambulatory surgery center (ASC) market is changing rapidly. Surviving in the current market is no longer as simple as meeting the needs of the community you serve. Competition among ASCs is now measured through a litmus test of strength based on collateral along with quality standing. These are now the deciding factors that determine winners and losers in the market.
Consider that hospitals and healthcare systems are more aggressively pursuing outpatient surgery strategies that include building and acquiring ASCs as hospitals and systems look to dimmish the impact of the ongoing migration of surgical care out of the inpatient setting and better support value-based care efforts. De novo ASC development is on the rise in markets throughout the country as surgeons, sometimes in a partnership, look to capture that surging volume. Private equity companies are also moving into the ASC space, often through the acquisition of a physician practice or megagroup/supergroup that owns one or more surgery centers.
This increase in competition is placing pressure on independent ASCs and pushing a growing number to consider a strategic partnership. The right partnership can provide an ASC and its physician owners with improved financial stability (in part by reducing the physician owners' financial risks) and access to resources and expertise that can strengthen a center's short- and long-term competitiveness.
This brings us to a question all independent ASCs should ask themselves: When is the right time to consider a strategic partner? For some ASCs, achieving internal stability and growth may be required before considering a strategic partner, but for others, the time is now.
Let's look at nine of the top indicators that a surgery center may want to consider a strategic partnership more seriously.
1. Management of staff disrupts daily operations
Once an ASCs surpasses 20-25 employees, the management of these individuals inevitably becomes more challenging and tedious — especially in the current environment where ASCs, like most other healthcare organizations, are experiencing higher rates of turnover. As the time and resources that must be allocated to staff management increases, it's likely that physician owners will be forced to take on a greater role in the daily operations of the facility and tackle work outside of their normal duties. This can negatively affect surgeons' case volumes, time to dictate (thus delaying billing), and overall satisfaction with the ASC experience.
A strategic partner can introduce human resources support, including providing guidance in recruitment, interviewing, hiring, and training processes; offering insight into benefits options; and helping secure cost savings for stronger benefits packages that can help with recruitment and retention of qualified staff.
2. Paper charting won't cut it anymore
As an ASC grows, so does the quantity of documentation it must complete for billing and compliance. It's only a manner of time before paper charting, which is quickly becoming obsolete, makes management more difficult, increases the risks of falling out of compliance with recordkeeping requirements, and prevents a center from achieving best practices. As documentation quality suffers, ASCs are more likely to be found deficient with regulatory and accreditation standards, and the risk of potential lawsuits concerning lack of proper documentation rises.
Eventually, an ASC will need to transition from paper to electronic records, such as through the adoption of an electronic medical record (EMR) system, and implementation of other software, like patient tracking and analytics.
This brings a potentially significant challenge for ASCs: The startup cost for even the most modest EMR systems can run in the tens of thousands of dollars and bring with them a monthly cost in the thousands of dollars. In addition to this expense, an ASC will need either internal IT support and/or to partner with a managed services provider that can help ensure proper implementation, setup, training, usage, security, and a host of other needs that come with moving to an increase in reliance on technology.
A strategic partner can help an ASC assess its EMR and software options, purchase the technology, and build the IT and personnel infrastructure needed to best ensure proper and maximum usage of the technology.
3. Need to capitalize on supply chain cost reduction
Most vendors discount their products when those products are purchased in bulk volume. A single ASC can only grow so much and perform so many procedures to justify the increased supplies and equipment volume that will move their purchasing power to a higher tier of cost savings. For some procedures, that elevated tier may substantially change the profitability of a procedure.
A single ASC's fortunes in this regard can essentially be changed overnight when a strategic partner brings in a large vendor platform of orders that then ties the ASC to the partner's existing vendor contracts. In addition, some strategic partners have relationships with local hospitals and health systems. This can further add to overall cost savings as well as improved supply and equipment availability, accessibility, and shipping time and decreased order delays.
4. Surgeon recruitment stagnant
Surgeon recruitment is often a key driver for growth and is essential for succession planning. If competition is increasing in an ASC's market, surgeon recruitment may be needed to offset the potential or likelihood of losing non-surgeon owners to a competing facility.
When a privately owned ASC is struggling with recruitment of new surgeons, a strategic partner might be an effective way to break through barriers. The partner may have relationships with practices and other surgeons in the market. The partner may also have a better ability to reach outside of the market and recruit available surgeons to the ASC. The added value the strategic partner brings to the ASC may support the appealing growth, long-term prospects, and strong distributions that available physicians are looking for that may not have been achievable prior to an acquisition. A meaningful distribution program for minority physician partners can help improve recruitment and secure retention of physicians.
5. Identifying growth opportunities but lacking the ability to achieve them
There are tremendous opportunities for ASCs to grow in the current market for reasons we've already noted and others, including the continued outpatient case migration, improvements in technology that are better supporting minimally invasive procedures, and the growing number of patients requiring same-day surgical care. But just because opportunities exist doesn't mean an ASC has the space in its facility or capital to capitalize on them.
A strategic partner can help an ASC move forward with such efforts that may otherwise have been out of reach. Whether an ASC is looking to expand an existing center, build an additional site, relocate to a larger location, or purchase new surgical equipment to support new procedures, specialties, and/or surgeons, a strategic partner can provide the financial support and additional resources to achieve this growth while helping reduce the risk to the physician partners' financial securities.
6. Struggles with revenue cycle performance
One of the many advantages of taking on a strategic partner is the departmental support the partner typically brings to the table. Many strategic partners offer an in-house revenue cycle management service supported by a team of coding, billing, and collections professionals; efficient systems; and policies and procedures that can be adapted by the acquired ASC. For ASCs struggling with their revenue cycle performance, a strategic partner with such a service can help identify and shore up problems and increase efficiency and performance, all while reducing the overall cost associated with running the center's business office.
In addition, a strategic partner with a large ASC platform may be in a position to strengthen managed care contracting. This can translate to an ASC adding new payer contracts and improving the rates and terms of existing contracts.
7. One full year of growth achieved post-COVID-19
An ASC that wants a strategic partner will need a strategic partner that wants the ASC. There are some qualities that strategic partners are increasingly looking for in today's market. One of the most significant presently concerns the pandemic.
ASCs were among the most impacted types of healthcare organizations during the lockdowns in 2020 and the subsequent, gradual reopening. Depending on geographical location and local policies, the individual impact of the public health emergency has varied over the past two-plus years.
In most situations, strategic partners see acquiring a profit-generating ASC much different than purchasing a rebuild (i.e., turnaround) facility. To maximize an ASC's valuation, recovery from the pandemic is important in not only snapshotting a future growth proforma but also demonstrating the stability of the ASC and its physician partners. By showing that it has achieved at least a full year of growth since the declaration of the pandemic, an ASC will enhance its appeal to prospective partners.
A successful year of recovery can support the timing for considering a strategic partner in addition to helping maximize overall valuation, indicating stability within the ASC, and validating the growth opportunities within the geographical location of the facility.
8. Three-to-five-year growth strategy with existing surgeons
A strategic partner typically wants to recoup its expenses within three to five years following the acquisition of an ASC. One of the first assurances a partner is looking for to mitigate its acquisition risk is to see that the ASC has strong surgeon engagement and a robust physician practice(s) that will drive surgical volume to the center.
At a minimum, strategic partners tend to like to see at least three surgeons on the clinical staff who appear committed to the ASC, are eager to bring their strong case volume to the center, and intend to remain on the center's board for at least the next five years. Note: The more surgeons that are affiliated with the ASC and actively performing procedures within the center, the less concerned a strategic partner is likely to be about the near-term prospects of the center.
If physician partners, especially those responsible for a high percentage of an ASC's surgical volume, plan to retire shortly after the acquisition, it becomes much more difficult to sell a center to a strategic partner. A strategic partner wants to assure risk is valuated and the opportunity to build on the ASC can be supported by existing physician involvement as well as a potentially robust physician recruitment process.
9. Surgeons align on moving forward with a strategic partner
To assure a more successful acquisition from a strategic partner, all or at least a vast majority of an ASC's surgeons must be on the same page with the transition. Animosity or tension among the ranks will only cause division and are likely to impede potential opportunities to encourage a strategic partner's interest.
Strategic Partnership: Why Now May Be the Right Time for Your ASC
No one predicted COVID nor could have anticipated the impact it had on ASCs. Now we are faced with a gloomy economy, fear of a recession, and growing interest rates compacted with the unknown risk of another COVID outbreak. Current and potential developments could lead to another devastating impact on surgery centers in the near future. For a growing number of ASCs that have performed a risk analysis on today's market, they've determined that taking on a strategic partner which can mitigate risk while helping facilitate growth is increasingly a worthwhile consideration.
The factors identified above provide an overview of when a company has reached a stage of growth where a strategic partner can deliver significant benefits to an ASC. We've also identified a few of the key qualities that strategic partners are looking for and that should be achieved if a surgery center hopes to secure and be successful with a partnership.
Once an ASC has reached the threshold discussed in most or all the areas highlighted, consideration of a strategic partner may be the most practical next step to more effectively achieve future growth while protecting the investment of the physician partners. If your ASC is at or approaching this stage, consider bringing in outside assistance that can help you spread the word about your interest in a strategic partnership and attract prospective partners to you.
At VERTESS, our team of expert Managing Directors helps ASCs and many other types of healthcare organizations effectively prepare for a transaction, attract and negotiate with potential partners, and secure a sales price that rewards owners for building a successful organization. To learn what we can do for your ASC, reach out and let's talk about the next stage for your center.
Volume 8, Issue 7, April 6, 2021
Owners of healthcare companies, practices, and agencies often ask us how they can increase their businesses' market value. Buyers determine the value of a business based on return on investment and riskiness of the investment. Business owners create value by increasing the return on investment and decreasing the riskiness of ownership.
Business owners can take steps to increase long-term value, increase short-term value, or both. The value-building steps that owners should take will depend on their exit strategy time horizon. In either case, owners may consider adopting an investor/owner mindset to attempt to view their business through an investor/buyer's eyes.
Some owners mistakenly assume that their business's value relates to the amount of dollars reinvested in the business. Reinvested dollars only create value if the reinvestment increases cash flow to the owner. Buyers focus on the amount of excess/risk-adjusted cash flow a business would provide them.
In this column, we'll first look at ways to increase net cash flow to the owners. We’ll then look at ways owners can decrease the riskiness of their business before concluding with a discussion about some of the key attributes that buyers are looking for in companies.
Ways to Increase Cash Flow to Owners
Increase Revenue — Revenue growth is a key value driver. Moreover, historical revenue growth shows buyers the potential for future growth (i.e., “proof in the pudding”). However, revenue growth should not be at the cost of declining gross profit margins.
Increase Profit Margins — Profit margins reflect the ability of an owner’s activity to make money. Focusing efforts on the products or services with the highest profit margins while reducing the company’s efforts on low-margin business lines is crucial to increasing cash flows.
Pursue Growth Opportunities — Identify and capitalize on future growth opportunities. The healthcare sector is constantly evolving, which affords entrepreneurial owners expansion prospects.
Segregate Customers — Separate highly profitable customers/patients from low-margin customers/patients and consider using outside providers to support low-margin customers/patients' needs.
Improve Operational Efficiency — If a business can increase its operating margin on existing assets, it will generate additional value. Owners should determine the industry average and top quartile operating margins and attempt to benchmark the top quartile. If cost-cutting measures are used to increase operating margins, be sure that the cost cutting does not result in a future increase in inefficiencies. By increasing wages, salaries, and technology expenses, owners may find increasing operational efficiencies and long-term operating profits.
Optimize Use of Debt Financing — Use debt to finance for value-building activities, such as adding additional service lines, facilities expansion, enhanced marketing campaigns, and state-of-the-art technology.
Be Willing to Consider Moving — If your current location is not optimal for long-term growth and access to quality labor, you might consider moving. An examination of the demographics of your market territory versus alternative areas might be worth undertaking.
Develop a Five-Year Growth Plan — Begin by brainstorming a comprehensive list of potential ways you can think of to increase revenue. Next, evaluate and rank each idea based on potential revenue impact, amount of effort, and implementation cost. Finally, use the plan to align your staff around a common purpose and close the strategy execution gap.
Develop a Strong Web Presence — Having an online presence helps spread the word of your healthcare services. Utilizing an effective paid advertising strategy can grow your visibility exponentially.
Focus on Attracting Millennials — Depending on your service offerings, you might consider making efforts to attract millennials. Within two years, millennials are projected to make up half the income-earning population. By 2025, that figured is projected to reach 75%. Today, millennials are one of the country's most important consumer segments.
Invest in an Enduring Brand — There is tremendous value of investing in your brand to drive long-term revenue growth. Your brand name becomes your brand’s calling card. Seeing your brand name and logo is often the first experience a customer/patient has with your business.
Ways to Decrease the Riskiness of Cash Flow to Owners
Achieve Recurring Revenue — Establishing or growing recurring revenue streams is critical. Recurring revenues are the portion of a company's revenue expected to continue into the foreseeable future. Unlike one-off sales, these revenues are predictable, stable, and counted on to occur at regular intervals in the future with a relatively high degree of certainty.
Secure Multiple Revenue Sources or Payors — Having multiple payors decreases risk by limiting the impact of reimbursement changes.
Establish Multiple Suppliers and Contractors — Similarly, having multiple suppliers and contractors decreases the risk associated with supply chain problems and contractor issues. Working with multiple suppliers protects against the risk of interruption.
Develop Accurate and Timely Financial Statements — By having well-timed financial reporting, you can better prepare your business and make sounder financial decisions to grow the business. Moreover, improved financial management allows you to focus on current financial matters while developing plans. Inaccurate financial statements will be discovered during buyer due diligence and will lead to a lower valuation or lost sale.
Establish Strong Internal Systems and Controls — Internal controls are a business's systems to manage risk and diminish fraud. Inadequate internal controls can lead to embezzlement, loss of intellectual property, and/or theft of proprietary data.
Demonstrate a Predictable Business — A predictable company has a specific and intentional focus, a detailed yet straightforward execution plan, systems and processes that are optimized to support the plan, the right skills and reward system to execute the plan, and the constant gathering and analysis of data to drive continuous improvement.
Track and Respond to Customer/Patient Online Complaints — Online patient reviews are growing more critical to healthcare organizations and their providers. In a study, 95% of patients indicated that they found physician reviews online to be reliable and more than 70% said reviews have influenced their choice of physician.
Review All Contractual Agreements — A legal review of all existing contractual agreements can help ensure no surprises come up during a buyer review. For example, a near-term expiration of a property lease agreement could scuttle a business's sale if the landlord has no interest in renewing the lease.
Take Steps to Lower Employee Turnover — Business owners who focus their efforts on building employee engagement can create a positive working atmosphere, give employees a sense of pride in their work, and encourage people to stay, avoiding the negative impact of significant staff turnover.
Create Barriers to Entry — Barriers to entry include patents and special licenses, specialized skills, established brands, restrictive government regulations and laws, economies of scale, and high capital investment requirements.
Put Yourself in the Buyer’s Shoes
In our experience, the most crucial feature buyers are looking for in a company is profitable growth. Buyers want to know that they can take what you have built and build on it. But, in their risk/reward analysis, they'll want to see that your strengths far outweigh your weaknesses (i.e., opportunities for improvement). Most buyers have a checklist mentality where they'll be looking to see that your business has at least some of the following attributes:
Diverse reimbursement/payors
Strong reputation and quality of services
Expansion in chronic disease management
Keen understanding of the current and future required level of staffing
Relevant certificate of need (CON) or other licensure requirements, where applicable
Continued investment in infrastructure and actions to pursue efficiency opportunities
Low revenue seasonality
Large population base with the right client demographics
Tenured, experienced workforce with low employee turnover
Reliable and consistent referral sources and contracts with providers
Clean billing audit
Good revenue growth
Strong operating margins
Summary
Whether you intend to sell your business this year, next year, or many years into the future, an integral component of your business plan should revolve around increasing company value. Not only will this help you secure a higher price when the time comes, but engaging in activities that increase value and decrease risk will improve the overall operations and short- and long-term performance of your business.
If you have questions about what activities make the most sense for your business and efforts to enhance its value for an eventual sale, we're here to help with more information on this and related topics. Contact us today!
by David E. Coit, Jr., DBA, CVA, CVGA, CM&AA
Volume 6 Issue 20, October 15, 2019
This article on healthcare company valuation by VERTESS examines the amount private equity firms are paying for companies in 2019. Private equity is composed of funds and investors that directly invest in private companies or that engage in buyouts of public companies, resulting in the delisting of public equity. Much of private equity funding is spent on healthcare, manufacturing, and service businesses.
To give you an idea of the influence of private equity firms, in 2018, they invested $582 billion in worldwide merger and acquisition activity, according to Bain & Company. What do private equity firms look for when pursuing investment opportunities? They typically seek companies with the following characteristics:
strong market position and sustainable competitive advantages;
multiple avenues of growth;
stable, recurring cash flows;
low capital expenditure requirements;
favorable industry trends;
strong management team; and
multiple areas where the private equity firms can create additional value.
Private equity firms usually pursue acquisition targets where the seller wishes to stay with the company post-purchase to help continue building value, although there are exceptions. They accomplish this by permitting the seller to buy an ownership position in the acquired company.
Most private equity firms have targeted rates of return for new investments. They look for a balance between risk and returns. Larger company acquisitions typically have less risk than smaller companies. As such, rates of return are higher for smaller-sized companies.
Current Required Rates of Return
Each year, Pepperdine University conducts a survey among private equity firms to determine the private capital market required rates of return. In its 2019 survey, Pepperdine found the following required rates of return on investments, depending on the risk being low, high, or median:
Companies with earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1 million to $10 million: 27.5% to 38.0%, with a median of 37.0%. These rates of return correspond to market multiples of 3.6x EBITDA to 2.6x EBITDA, with a median market multiple of 2.7x EBITDA.
Companies with EBITDA of $10 million to $25 million: 23.0% to 28.0%, with a median of 25.0%. These rates of return correspond to market multiples of 4.3x EBITDA to 3.6x EBITDA, with a median market multiple of 4.0x EBITDA.
Companies with EBITDA of $25 million to $50 million: 20.3% to 24.3%, with a median of 22.5%. These rates of return correspond to market multiples of 4.9x EBITDA to 4.1x EBITDA, with a median market multiple of 4.4x EBITDA.
It's important to note that there are outlier healthcare companies that will be purchased at slightly different market multiples. Moreover, certain sectors within the healthcare industry are more favored by private equity firms and thus sell at higher multiples.
Choosing the Right Buyer Type
What does this mean for your healthcare company? If you have a well-performing healthcare business with EBITDA of say $2 million, you should expect private equity firms to offer you between $5.2 million and $7.2 million for your company.
Are private equity firms the best buyers for your healthcare company? Perhaps, although that depends on your exit plans. If you’re looking for a partner to provide growth capital and strong business acumen, private equity might be worth considering. If instead, you’re simply looking to move on to other adventures, private equity firms might not be the best good fit.
Alternatively, strategic buyers may be more suitable for you, depending on your needs. Strategic buyers can immediately add value to your company through identified synergies. These synergies may increase revenues or decrease operating costs that result from added products or services, combined market share, expanded market entry, combined talent and expertise, intellectual property, and other opportunities.
By David Coit, DBA, CVA, CVGA, CM&AA
Volume 5 Issue 3, January 30, 2018
Today’s turbulent healthcare industry offers many challenges for healthcare executives. Despite this, providers can create significant value that will help them to build their healthcare businesses, finance growth, and ultimately sell their companies for the best price. VERTESS shares the seven key value drivers for healthcare owners in 2018 include the following:
1. Focus on Improving Quality of Care and Clinical Outcomes
Healthcare providers using outcome-based approaches, where delivery of superior outcomes is a key differentiator, are maximizing the value of their company. For example, behavioral health clinicians can drive improvement of care by designing customized and increasingly precise interventions for each client, yielding better outcomes and lower provider and payer costs.
2. Use of Cloud Computing IT Solutions
Cloud services spending by healthcare companies is expected to reach $9.5 billion by 2020. Such services offer confidentiality of client information, scalability, and collaboration among providers. Moreover, cloud-based solutions are increasingly being used for big-data analysis and storage of recorded video of telemedicine interventions, leading to increased operational efficiency.
3. Better Designed Workflows that Improves Care Delivery
Healthcare providers are increasingly using ad-hoc quality improvement teams to change workflows in an effort to reduce redundancies, streamline processes, reduce errors (especially scheduling, referring, and patient follow-up), and most importantly they improve patient outcomes for an array of specialist and non-specialist medical practices.
4. Upgraded Infrastructures
Healthcare providers can create value by making physical changes to their facilities that reduce energy cost, enhance wireless network coverage, and improve client experiences. Improved client experiences include infection control, reduced nurse/staff call response time, enhanced client entertainment and comfort.
5. Increased Use of Healthcare Provider Collaboration
Healthcare providers that capture and share information among caregivers improve productivity, reduce paperwork, improve collaboration, boost creativity, and increase customer value. For example, an urgent care center that utilizes computer tablets to convey real-time patient information to doctors, nurses, techs, and specialists, can facilitate a seamless collaboration among caregivers and reduce operating expense.
6. Focus on Creating Customer Value
Healthcare providers are increasingly seeing patients as customers rather than cases or symptoms. Healthcare providers enhance their value by showing appreciation for customer patronage, providing service enhancements based on the patient’s unique demographics, exhibiting genuine friendliness, recognizing patients by name, and providing extra attentiveness. For example, a dermatology practice where staff are provided the names and photos of all patients being seen that day, allows them to recognize and greet patients by name for a more personalized experience and leads to practice growth and possible expansion.
7. Use of Technology to Enhance the Hospital in the Home Model
Healthcare providers are increasingly using technologies to remotely monitor patients. Active and passive technologies, such as cameras, sensors, smartphone applications, tracking devices, and other related devices/apps, allow caregivers to monitor patients at home. Such devices can capture vital data, allowing caregivers prompt responsiveness of patient needs. For example, cardiac event recorders and transmitters store and transmit real-time ECG/EKG data such as an irregular heartbeat, which can be a warning sign of arrhythmia.
When you adopt one or more of these key value drivers to your practice, you’ll often quickly see positive bottom-line results. You and your staff may also enjoy a more rewarding daily work experience that will translate into greater long-term bottom-line value for your company or practice.
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