What’s the Value of Your Business?
By Nishen Radia, FocalPoint Partners, LLC
In this month’s Rock-Pond article, we discuss the key issues any entrepreneur should understand when assessing the valuation of their healthcare assets.
Time and time again, entrepreneurs, when considering their exit options for their business, ask us the same question: “How much is my business worth?” And the answers we give every time are exactly the same: more questions right back at you! All businesses are not created equal!
Valuation is an art, and not a science. This is particularly the case when thinking about home healthcare providers, where the quality of business and operations can have deep impacts on valuation. Some of these factors can be controlled, some can’t. Yet acquirors often revert blindly to “industry multiples”. But as recent deals have shown, the right asset positioned correctly can optimize valuation and blow industry averages away!
So, what drives valuation and what does this tell us about how to position a company? Firstly, growth is key. The reason why specialty businesses trade at strong multiples is the scaleability and growth. As an entrepreneur, always map out your growth strategy. Being able to demonstrate where the company is going and how you’ve executed on previous years’ strategies will be critical in driving valuation. Tied to growth, the second factor is profitability. Margins remain key, so make sure that growth is profitable.
You’ve all heard that in real estate, the key is location, location, location. When valuing companies, the key is management, management, management. A company with well-run operations, strong sales and marketing and tight financial controls will always be valued at higher multiples. A strong management team will allow a buyer to have greater confidence in the target’s growth.
These factors are applicable to all companies. Home healthcare providers face an additional burden in demonstrating why they should be valued higher. There are a number of other factors that need consideration. A well-diversified payor mix is key, as significant payor concentration vastly increases the risk to a buyer. Billing and collection are highly relevant. Every deal we have closed at
FocalPoint in the healthcare space has involved buyers spending time poring over cash collection schedules. To the extent a company is not collecting over time, the buyer will start to discount revenues and profitability.
Healthcare entrepreneurs must continually innovate to remain in line with industry trends. The recent advent of ambulatory infusion suites (“AISs”) is an example. Entrepreneurs that had a cohesive, robust strategy for AISs were rewarded by buyers who valued the initiative to stay ahead of the curve in an ever-changing healthcare environment.
Finally, there are a whole set of factors an entrepreneur just cannot control. Geography is critical – buyers see certain markets as more strategic than others. That cycle of focus is constantly evolving and should be less of a worry to entrepreneurs. Macroeconomics and capital markets will affect value. We are in one of the best M&A markets of recent times for a simple reason—buyers have been given extra confidence by relaxed capital markets and an economy that has been strong. That has driven many of the high valuation’s we’ve been seeing recently. Beware – it won’t last forever!