Earning Higher Multiples Past Financials
Earning a higher multiple is the key to a successful transaction between buyer and seller in the urgent care industry. Although financials and other factors are large players in the game of selling one’s business, industry leaders say that there is more to gaining higher multiples than by simply cleaning up your financial records.
Blayne Rush, President, owner of Ambulatory Alliances LLC says that when examining the urgent care space, it is fairly common knowledge that the more centers one has, to a certain extent, the higher the value multiples that are paid.
Rush says that this is for a number of reasons. According to Rush, the reasons include the cost associated with running the business, the ability to leverage debt on that business, the interest level from the competing parties, and the interest level from multiple types of buyers.
“When you look at management companies, assume for a second that they are not in a market. They have an interest in going in that market but most of those guys will tell you, ‘Hey, I need five centers to be able to move into a local market.’
“Because of the vast fragmentation of the marketplace, I’m going to make an educated guess and say that the one to three owners own about 60 percent, if not more of all of the centers out there. Something has to give. 60 percent or more of the owners have one to three centers, so who is going to give? Well, one thing that is going on is that people are looking at consolidating their practices,” Rush says.
“If you have three centers, and you have another person that had three centers in essentially a defined market, you can turn around and merge those two businesses and end up with six centers. You can also lower some of the cost associated with running the three center companies by eliminating duplicate services, raising the profitability due to the consolidation. That’s one way to attract more buyers, creating more competition, and driving the price up.”
Rush goes on to explain that the same concept can apply for an organization that has ten centers. Rush gives an example with two organizations that have ten centers and they merge. Rush explains that whenever you have 20 centers, as long as there is a professional team of higher level administrators and leadership, there is now a platform.
Rush says that with a platform, private equity groups will become interested in the business, larger health systems, large regional physician practices, and payors that are interested will also begin to come around to the business.
“Now you go from two ten centers that might get a 7 to 10 multiples, to the next tier, and you have more competition,” Rush says.
Hunter Outcalt, manager with HealthCare Appraisers agrees that consolidation is key to gaining higher multiples, especially with private equity buyers that typically like to roll up multiple businesses or locations into one consolidated entity so that they can streamline operations.
“What we are really seeing is that the consolidation factor really does diversify the risk. This way, if there is a month or two where one of the urgent care center locations has a decrease in profits, the other four or five locations can offset those decreases in order to support the cash-flow and minimize the impact to the investor. It really does help diversify that risk,” Outcalt says.
Jim Connors, Director of Valuation Services with Pinnacle Healthcare Consulting says that consolidations may contribute to higher multiples as long as there are no regulatory issues as far as Stark and Anti-Kickback laws.
“The fact that there are two centers combining, you could have the sum is greater than adding the parts together. By combining, maybe you can decrease costs on a per unit basis because now you have higher volume over which to spread out that overhead. Maybe now you have more contracting power with the commercial payors so that you can drive rates higher. You can have a few things like that, that will allow combining multiple facilities and allow the buyer to pay higher multiples,” Connors says.
“The caveat is that physician involvement may preclude one from doing that without running afoul of the regulatory laws.”
Connors says that aside from consolidations, there are other key aspects involved with raising the multiple.
“If you are looking at the multiple, there are really only two things that drive the multiple; the risk and projected growth in earnings. Lower risk is going to equal a higher multiple, higher projected growth is going to equal a higher multiple and vice versa,” Connors says.
Connors says when looking at the risk side of the equation, issues that might impact risk are going to be the number of physicians providing services to a center, how much competition there is in the local market both for ASCs as well as other physicians or physician groups that are supporting the ASC.
Connors adds that the the payor mix is also something to focus on when determining value.
“Is it mostly dependent on Medicare? Is it one or two large payors that have a lot of negotiating power? Those are another couple of things that can drive risk,” he says.
According to Connors, the growth side is somewhat related in that it examines the projected growth in both top line revenues and earnings that can be based on volume growth.
Connors says that as volume goes up, there are likelyeconomies of scale that allow certain fixed costs to be spread over a wider revenue base, or there may be increased contracting power with certain suppliers so that per unit costs can be decreased.
“Whenever buyers look at this they are going to look at profitability and risk profitability. If you are being bought by an organization and you have better contracts than they do. Well, there is an argument that can be made that you get paid more for your business because they are potentially going to take on your contracts,” Rush says.
“Say that you have a unique model that the payors really respect; I think we will see more and more of these unique models being reimbursed more because you are saving the system money, and you are saving the payor’s money. You have to prove that up, but you will be able to go and demand higher money for that.”
Outcalt says that the key to taking control of a your business to prep it for higher multiples is minimizing the unnecessary costs.
“You may want to join a Group Purchasing Organization, where you will be able to leverage off of larger bulk orders in order to reduce those supply costs and drop more money into the bottom line. Also, being able to leverage off non-physician providers, that typically do not command the higher level of compensation that physicians do, can be an effective way of still providing quality care but reducing the costs required to do so.” Outcalt says.
He adds that expanding into additional services can really help the bottom line to the extent that there are additional ways you can add complimentary services.
“Adding imaging or pharmacy services could compliment the urgent care setting and provide patients with comprehensive care in the same location while adding additional profits to the business,” he says.
Rush closes the conversation with some words of advice for business owners reaching for the higher multiples.
“Have better payor contracts, build a better model that is higher respected, treat higher acuity type patients and consolidate some of these centers. I think that is going to be a huge future.”
If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.