EDGEMONT CAPITAL BLOG
Healthcare M&A Value Drivers
You’ve spent years growing your specialty medical practice…building a steady and loyal patient base that trusts you and your team to care for them in the best manner possible. Now the time has come for you to enjoy your years of labor through a liquidity event or total business sale.
Selling a medical practice – be it anesthesia, urgent care, dermatology, clinical research or any other discipline – is not the same as selling a basic distribution or manufacturing company. There is a nuance to the healthcare M&A process that involves understanding market dynamics, insurance payments, Medicare, Medicaid, goodwill and a host of other issues key to a successful transaction.
Valuing medical practices is also distinctively different than most other company types. Considerations must be made beyond simply understanding the EBITDA (or profitability) of the practice. Naturally, it is wise to work with a healthcare specific M&A team that understands how these valuation metrics are realized in the market.
Below, we list a few key influencers of company value for a healthcare or medical related firm. To value a medical practice, there are a variety of components of the practice to evaluate including:
- Location and current volume of the practice. Is the practice located in a busy inner-city region? Is the practice in an upscale area? Location often defines market, which often defines an array of other factors from pricing to customer lifetime value, both of which have significant impact on company value long-term. [And “affluent” markets don’t always translate to “more valuable” practices…since wealthier communities frequently have more service providers, and thus more competition.]
- What is the specialty of the practice? Is it a research site, skin care center, urgent care facility, or physician group? The specialty of the practice can have a significant impact on value as it relates to the demographics in the area and the competition nearby. It also greatly impacts reimbursements and other key business metrics.
- Do the lead physician and the bulk of the team (admin, nurses, techs) plan to stay on board for an extended period of time? Medical practices are highly referral based and the team on board plays a major role in patient retention. Most businesses have challenges with transferability, healthcare focused businesses are particularly susceptible to transferability issues. The greater the retention of key people and talent, the higher the valuation.
- Reimbursement procedures and climate. Are the majority of patients Medicare patients? What kind of reimbursements can a new owner expect from insurance companies? This point has a major impact on the cash flow of the business, which is of major interest to a buyer.
These considerations do not limit the focus on business fundamentals. Buyers of healthcare companies will consider typical financial assets including accounts receivable, likelihood of collection, equipment, prepaid insurance, and cash on hand as influencers on value. They also look at other issues including leases, payroll taxes, and retirement plan contributions.
Goodwill can be difficult to value when it comes to certain medical practices. The goodwill value is typically broken down into two categories:
Practice goodwill – practice goodwill is an intangible asset of the entity that is separate from the value of the personal reputation. This includes the potential patient base that the practice serves, the specialty addressed, and the likelihood that the practice will continue to service returning patients.
Professional goodwill – professional goodwill is goodwill that can be attributable to the reputation, individual skills, and relationships of the physicians in the practice. Practicing medicine is very personal and having a staff that patients trust and relate to certainly has value.
Regardless of your firm’s area of focus or specialization, understanding these often overlooked areas of interest are indeed critical to buyers. Lastly, understanding these factors will impact your business’s valuation and is key to better understanding your potential value.