Why Getting A Valuation Of Your Healthcare Company Might Be The Most Important Thing You Do In 2018
by David Coit, DBA, CVA, CVGA, CMAA
Volume 5 Issue 9, April 24, 2018
Healthcare business owners rarely seek a valuation for their company unless they consider it a necessity. They will get a valuation because they must settle a shareholder/partner dispute, it’s required to resolve a divorce, or it’s essential to obtain a loan or line of credit (LOC). The problem with this way of thinking is that most healthcare business owners miss the opportunity to better understand the value of their company, how to strategically increase value over time, and how to integrate a valuation with longer-term personal planning.
Here are several key reasons why securing a valuation of your healthcare company might be the most important thing you do this year:
Learning What Your Company is (and Could be) Worth – Many owners wait until a life-changing event has occurred, or is about occur, before valuing their healthcare company; when it’s too late to make changes that increase value. For example, we recently performed a valuation of a behavioral healthcare company where the majority owner is in his mid-60’s and wished to sell the company. The owner was surprised to learn that the value of the company was about half the value he had hoped it would be. Had we valued the company three to five years earlier he would have had an independent, market-based expectation of the company’s future value, and he could have taken steps to increase value before selling.
Multi-Owner Healthcare Companies Getting on the Same Page – It’s highly likely that each partial owner of a healthcare company has a different expectation of value than their partners. Having very diverse expectations of company value that are not openly discussed and considered, can lead owners to make poor decisions. For example, a durable medical equipment (DME) client with several owners had one owner who planned to exit the company in a couple of years. The partial owner presumed the remaining owners would buy his ownership interest for a price he had contrived on his own. After we completed an independent valuation, the owners were somewhat surprised by our value determination, especially the retiring partner whose price significantly exceeded reasonable value parameters. The partial owner stated that due to the valuation results he would delay his retirement and instead work hard for the next few years to increase company value.
Learning the Key Value Drivers of Your Company Based on a Buyer’s Perspective– Most owners of healthcare companies focus on top-line, bottom-line outcomes as key value drivers. While revenue and profit growth favorably impact value, there are many other value drivers. For example, we recently valued a sole practitioner dental practice, where we discovered that the landlord of the building was unwilling to renew the lease on a long-term basis, all business decisions were made solely by the dentist, the employees had little autonomy, the practice used older technologies, and a significant amount of revenues were from contracted dental plans. Needless to say, the dentist was not pleased by the valuation results, but he did learn what he would have to do to improve value. The earlier the valuation, the more opportunity there is to enhance value over time.
Integrating Your Business Planning and Personal Financial Planning – Few owners of healthcare companies integrate their business planning and personal financial planning until they are exiting their company. An owner’s professional goals should align with their personal goals. Ideally, a valuation provides a starting point in developing a roadmap for leading the company to where the owner wants the value to be in the future. Moreover, the integration of tax planning, business planning, and personal financial planning over time can save healthcare business owners significant tax dollars through the life cycle of their business as well as the duration of their retirement.
Understanding Your Options – Many owners of healthcare companies report being approached by one or more potential buyer out-of-the-blue, including very reputable investors who have discovered a particular niche. Knowing the value of your healthcare company, and perhaps having an idea of the future potential value, puts you in a position of negotiation strength. For example, soon after completing a valuation of their OB/GYN practice, our client was approached by a local hospital about selling the practice. The owners were well-prepared to evaluate and negotiate the hospital’s offer after having recently completed a valuation.
Obtaining a market-based valuation of your company is a very cost-effective way to understand value and plan for the future in today’s dynamic healthcare marketplace. Not only will you know about your company’s value, but you will also have a keener sense of what you need to do to build value over time for your employees, as well as your family.