HOW VALUABLE IS YOUR HEALTHCARE BUSINESS? HERE’S A SHORT GUIDE
19 November 2019 | Featured
Thinking of selling? Maybe it’s time to bring in other interests so you can give time and energy to family or other priorities in life (maybe even yourself!) Or perhaps you’re just curious to know the value of your practice in case you do decide to put it on the market at some point?
Many healthcare industry business owners are well wide of the mark when placing a value on their prized asset. It’s all too easy to overvalue and under-prepare for that exit, believing in a huge potential for that business that buyers unfortunately don’t see.
The Golden Rule – your business is only worth what someone is willing to pay for it!
Having an inflated price fixed in your head can seriously hold up your exit strategy. Awareness of the factors considered in determining your practice’s value will help you avoid nasty surprises when you do take the plunge. Also, understanding what influences value enables you to take informed actions to increase it in the coming months or years. Many factors are obvious; others not so. Some you have control over; and others you don’t. Here are just nine of the most important considerations…
1. Reasons for Selling
It may seem obvious, but the first question is ‘why are you selling?’ If you’re forced to sell (and this is known by the buyer), the value of the business naturally falls. Of course, adverse circumstances would lead to a forced sale, but this does put you in a weaker bargaining position when it comes to selling.
If it’s at all feasible, try to give yourself the longest lead time possible to negotiate before you sell; rapid, forced sales will ultimately be detrimental.
With all other things being equal, smaller practices are often viewed as higher risk than larger, more established businesses. The very fact that the practice has more employees and generates higher revenues may be seen as a sign that it is strong. After all, it must have survived difficulties in the market in the past and possesses the people and processes that have created an environment for growth. A larger business tends to indicate stability – and prospective buyers like to see this.
How many years has your practice been operating? While potential is a very important factor in determining value, so is a strong track record over many years.
If you can demonstrate years of strong performance, steady cash flow, and an established loyal client or patient base generating stable recurring revenues, you are ticking many potential buyer boxes. Practices that have been trading for a year or two are far higher risk, even if they are performing well. They may be simply riding the market or a particular trend.
4. The nature of your practice’s assets
Unlike a manufacturing business where the tangible assets are usually greater than intangible assets, many practices would rely on goodwill as a major factor in value considerations.
In reality, the value of a practice also depends upon many other factors that office-based businesses may also score well with (such as customer loyalty, intellectual property, brand strength, and so on). Medical technology and practice equipment and stock is important, but intangibles are key.
5. The key financials: EBITDA
Valuing a practice used to be done using a percentage of collections, but today, a multiple of earnings before interest, taxes, depreciation and amortisation (EBITDA) is the more widely accepted formula. An investor will be looking for the actual and potential cash flow on a debt-free basis to provide a clearer idea of prospective return on investment.
What is considered a ‘normal’ EBITDA multiple to use for valuation purposes? The answer is highly variable due to the uniqueness of each practice and is affected not only by the factors listed in this article, but also by market sentiment. For example, in a ‘bull market’ when there are a lot of buyers, valuations are higher, and a practice could attract a buyer willing to pay a 10 times EBIT multiple. That same business, within a different market environment with a less bullish sentiment, may only attract a 3 times EBIT multiple.
Both of these financial factors are equally important, and don’t even take into consideration factors influencing the prospective buyer – an individual, a group of doctors, a management group increasing its portfolio or a private equity company? Added to that is the last factor impacting financials – once again, it’s timing.
6. Future performance and projected cash flows
While past performance can demonstrate financial stability, it’s future performance potential that will get buyers’ eyes lighting up.
It’s important to be able to show growth potential. With this in mind, how well does your practice attract new patients and boost cash flow? A solo practitioner compared to a group practice will vary greatly in this area, but both can demonstrate retention in different ways, including any strategic marketing plans, supplier partnerships and community interaction.
7. Structure of the deal
The way the sale is structured may affect the price you sell for. Flexibility to fit in with the needs of the buyer may help you command a higher overall price. There are different ways to structure a deal, affecting the amount of tax payable and the debt service: an ‘all cash’ sale will usually mean a lower value than seller financing.
Here are some basic guidelines:
- Seller financing: businesses sold without any seller financing generally sell for 10% to 15% less.
- Stock sale/Asset sale: selling stock means a single capital gains tax for you but the buyer may prefer an asset sale to reduce income tax.
- Allocation of sales price: consulting expenses are tax-deductible to the buyer so they may value a business more with a high allocation to consulting; you, as the seller, may want to limit the allocation to consulting because you will pay the ordinary income tax rate on it.
8. The cost of access to capital in the market
When interest rates are high, investors borrow less. It’s the rule of the market. This naturally has an effect on the value of your business as there are fewer potential buyers; and any interested parties may drive a harder bargain than when capital is cheaper and more available, as the perceived risk is higher.
9. Other ‘intangibles’
The value of any healthcare business will also depend on other more subjective, intangible factors. These may change with the perceptions of different buyers and may be harder to quantify:
- How crucial is the contribution of the owner/s to the success of the practice?
- Is it located well, with adequate parking, and access to a chemist alongside other service businesses and passing traffic?
- Is the practice highly dependent on fewer patients?
- Are practitioner and supplier relationships robust and likely to last?
- Is the management team and staff strong – and likely to stay if the practice changes hands?
- Does the practice have intellectual property of great value?
- Are systems, processes, and procedures clearly defined and documented?
- What is the practice’s reputation in the market?
- Is it favourably placed against competitors?
- How marketable is the practice?
Focus on what you can control!
Now you have an idea of some elements involved, what are the next steps? Beyond being prepared and making sure that all your paperwork is in order (including cash flow statements, historical and projected profit and loss statements etc.), planning your exit strategy (and having that in writing) will go a long way.
This should be flexible enough that you are not in the position of HAVING to sell for less than you would like, or otherwise put you in a position that doesn’t suit the lifestyle and outcomes you have been working towards. Working closely with trusted financial advisers and planners will ensure you have your practice in the best possible health when the right opportunity comes along. Contact your Kennas business specialist today to set yourself up for success in making the most of your practice.