Analyze the Value of a Business Today for Profitability Tomorrow
When looking to the future and wondering how much their current healthcare business will go for, physician owners tend to focus on just that, the future. While this is not an incorrect direction to look, these owners should examine what their business is worth currently, and the many ways that they can improve their value up to the time they are ready to sell.
Curtis Bernstein, principal at Pinnacle Healthcare Consulting says that if a business desires to determine what their business is worth in the present time, they need to be looking at their income statement first and foremost. They also should examine recent sales of similar type businesses in the market in order to gain a better idea of what types of multiples could be expected if they were considering a sale in the near future.
Although Bernstein refers to examining competition, he says this method is only really useful if the competition has recently been involved in a healthcare transaction.
Blayne Rush, Investment Banker, President, Ambulatory Alliances LLC explains that the most important thing that drives value is profitability and the risk to that profitability. The second most important thing is the growth. Buyers are buying the future business, not the historical business in a transaction.
“You have got to look at your business, the growth and the risk of that growth, you want to analyze aggressively because you want to do this from the point of view of the buyer side. The buyer side is going to come in and scrutinize everything about the business. Therefore, you want to scrutinize everything times two, and then fix whatever is showing,” Rush says.
“I am not suggesting that you want to go and do something that is not correct like fudging the books. What I am saying is to look at your business from the potential buyer’s standpoint, because that is what we would do when the transaction came around. You want to say, “Okay, here are the potential red flags, and we are going to fix those.” Are you billing correctly? Are you billing aggressively, not aggressive enough? What is your staffing cost? Anything that affects the profitability and then the risk to that profitability; they look at risk profile as buyers.”
As far as the importance of understanding what a business is worth, Bernstein says that this is important if the seller truly wants to turn a profit on the sale.
“A buyer may offer you a purchase price that is below value. Obviously they are going to try to start negotiating low. You will want to know how low they are starting compared to what the business might actually be worth,” he says.
Scott Witter, director of business development, M&A at U.S. HealthWorks says the main way to find out the backstory behind a business is through financial and operational documents.
Witter says the first step in looking at these documents, examining the income statement. According to Witter, the more detailed the better when trying to determine value.
“It’s simple things like having revenue broken out amongst service lines can be very enlightening to a potential buyer. You’d be surprised by how many people don’t necessarily track revenue by location, by clinic. That becomes very difficult for a buyer because you don’t really know what’s going on at each individual location. You don’t know which ones are successful, which ones are struggling, where the growth is coming from. All of that I think is extremely important,” Witter said adding that the same goes for the expenses.
“The more detail you can provide to a potential buyer, especially a strategic buyer, the better. We might look at your spending on advertising and think we can make some savings there. We might think you are spending too much on medical supplies. There can be a whole litany of expenses there. WE might think we could do a little bit better buying here, or there are costs that we might be able to centralize and remove from the business,” Witter said.
According to Witter, these changes that a buyer could make would make the business more valuable to them and will potentially be reflected in the purchase price and the valuation.
When examining the value of one’s current business, Bernstein says there are some areas that could be overlooked for improvement. Some of these include missing the opportunity for new service lines, strategic opportunities for all potential buyers if there is a Fair Market Value standard that is being followed.
Rush says there are several things in value that are overlooked, and he believes potential sellers look at their business similarly to how they look at their children. Instead of looking at it from a critical eye, they tend to downplay the issues in the business and try to magnify what is great about the business.
Rush says that one of the things that are typically missed that go to straight to the risk category is staffing. A business owner should be aware of the stability of their staff. Also, the business owner needs to analyze how easy it would be for the buyer to understand the business simply by reading the books.
“Is your account set up easy to follow? Let’s say you have multiple centers, each center has its own classification on the account, and even within each center, there should be different classifications of the revenue. What line of service is driving the percentage of revenue and what payor is driving that? The same thing goes with the cost. Do you just have cash in and cash out? It is hard to figure out a business’ value, especially when the books are all jumbled up. You used to get people’s books in a shoe box; well, if it’s all jumbled up electronically, it is still just an electronic shoe box,” Rush says.
Those types of things are overlooked. Rush adds that people also under-look these details thinking that they are going to retire in the next year.
“Do you understand if you are seeing patients and are working in the business versus on the business and driving the business, that is a huge risk to the revenue of patients when you go away. You need to start looking at that ideally between 2 and 4 years prior to retiring. I think it is a tough question to answer when asking how much a business is worth today versus when you are going to sell it. It is all predicated on a lot of internal and external factors that are very complex. It all attributes to the facts of the transaction. Who needs a deal in the marketplace? How many people are in your marketplace? Potential buyers want to be 2 ½ hours between your business, they don’t want to be a state away,” Rush says.
Where Bernstein says a competitive analysis may not be effective, Rush says that he doesn’t know that performing a competitor review would allow a potential seller to equate their business to an exact dollar amount, but, yes, that does determine what their value is in the market place for potential buyers. It helps to show how the business looks to those people willing to buy it. They are going to come in asking if you are a dominant player in the market, or if you have a strong brand.
Rush says sellers want to know who their competitors are and how they compare to those brands. This is no different than if the business owners were to look at some comparative analysis nationally or statewide, but on performance metrics. These metrics include patient volume, through put per hour, per day, per month, profitability per case, etc. All of those types of things are important to look at, and sellers want to be able to look at that and be able to compare competitor data to their own businesses.
“For example, looking at your business and competition, you could say, “Okay, my revenue per patient is low, but why? Well, it turns out I haven’t been using that code that I should be using or have the right to use.” I have experienced that where people were leaving 200 to 500 thousand dollars a year on the table, and that is straight to the bottom line. You wouldn’t know it unless you were analyzing it and aggressively looking at it,” Rush says.
When discussing the frequency of being updated on a business’ value, Bernstein says the frequency depends on how many owners are involved in the business, the age of the owners, whether they are getting close to the point where they need to plan for an exit. In the situation where the owner is close to planning for an exit, Bernstein says the owners would obviously want to remain on top of their business’ value as the transaction looms in the near future. One of the benefits of regular valuations is if the owner needs money to be able to grow and expand they will know that they are able to get that due to knowing what the value of their business is if you need to borrow against the business.
However, without a transaction in the near future, Bernstein does not see the need for a business owner to seek out their valuations advisor.
If you would like to learn more about the concepts covered in this article, want to sell your business or discuss how Ambulatory Alliances, LLC might be able to help you out, contact Blayne Rush, (469)-385-7792, or Blayne@ambulatoryalliances.com.
If you have suggestions for future topics, email Blayne@ambulatoryalliances.com.