Why Your Healthcare Clients Should Have Their Companies Appraised
by David Coit, DBA, CVA, CVGA, CM&AA, Director of Finance + Valuation
Volume 6 Issue 13, July 2, 2019
For most owners of a healthcare business, their company or practice is their most valuable asset. Yet, most of these owners do not know the value of their company nor the key value drivers that attract buyers.
Furthermore, few owners of a healthcare business ever seek to understand the value of their company unless it is a necessity, such as settling a shareholder/partner dispute, settling a divorce, securing bank financing, or selling the business. The problem with this way of thinking is that these owners miss the opportunity — through gaining a stronger understanding of the value of their company —to strategically increase value over time and to in integrating that value into their personal financial planning.
Important Reasons to Obtain an Appraisal
Here are four of the key reasons why obtaining an appraisal (i.e., valuation) of their healthcare company is important for your clients to do:
- Learning what the 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. Unfortunately, at this point, it’s usually too late to make changes that can increase value.
For example, we recently performed an appraisal of a behavioral healthcare company where the majority owner was in his mid-60s and wished to sell his company. The owner was surprised to learn that the value of the company was about half the value he expected. If we valued the company 3-5 years earlier, he would have had an independent, market-based expectation of the company’s future value and could have taken steps to increase value before selling.
- Multiple owners getting on the same page. It’s highly likely that each partial owner of a healthcare company has a differing expectation of value than the other partners. Diverse expectations of company value that are not openly discussed and considered can lead owners to make poor plans and decisions.
For example, a durable medical equipment client of ours with several owners had one owner planning to exit the company in a few years. This partial owner presumed the remaining owners would buy his ownership interest for a price he had contrived. After we completed an independent appraisal, the owners were surprised by our value determination — especially the retiring partner whose predetermined price significantly exceeded fair market value. The partial owner advised us that due to the appraisal results, he would need to delay his retirement. In addition, he would need to work harder than he planned for the next few years to increase company value.
- Learning the key value drivers of the 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. We discovered several characteristics of the practice that negatively impacted value:
- 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;
- employees had little autonomy;
- the practice relied upon older technologies; and
- a significant amount of revenue was from one contractual dental plan.
Needless to say, the dentist was disappointed by the appraisal results. However, he learned what needed to be done to increase the value of his practice. The key takeaway: The sooner the appraisal, the more opportunity there is to increase value over time.
- Understanding their options. Some owners of healthcare companies report being approached by one or more potential buyers “out of the blue,” including very reputable investors/buyers who are targeting a particular niche. When owners know the value of their healthcare company and perhaps have an idea of the future potential value, it puts them in a position of strength in negotiation a fair price.
For example, soon after completing an appraisal of a client’s OB/GYN practice, the owners were approached by a local hospital interested in acquiring the practice. The owners were well-prepared to evaluate and negotiate the hospital’s offer.
Other reasons owners of healthcare companies should consider getting an appraisal include:
- Exit strategy planning
- Buy/sell agreements
- Shareholder or partnership disputes
- Gift tax planning
- Estate planning
- Access to investors
- Key person insurance
- Transitioning business to family members.
Preparing for the Future
Obtaining a market-based appraisal of a company is a very cost-effective way to understand value and plan for the future in today’s dynamic healthcare marketplace. Not only will owners know about their company’s value, but they will also have a keener sense of what is required to build value over time for their employees and families.
As a skilled Wealth Manager or Investment Advisor, having an appraisal of your client’s company allows for a holistic approach to managing their financial affairs. By knowing the value of their company, you can better create a road map to reaching your client’s financial goals.