Establishing Long-Term Value from Day One
Establishing long-term value for a healthcare business is something that needs to be meticulously planned from the startup phase of a business’ lifecycle. Even before an owner decides when they would like to potentially sell or expand their business, professionals say they must take into account the importance of maintaining long-term value in order to be best prepared to show off their business when the time comes to part ways and make the most profit from their efforts over the years.
Lucas Hutchison, Senior Consultant with Pinnacle Healthcare Consulting says that there are a few main things to keep in mind when thinking long-term value.
“I think off the top of my head, demand for service or product is important, depending on the type of business that you are. For healthcare, physicians need to be looking at what sort of different types of services that physicians can offer and modify. They also need to be keeping an eye on what sort of services may be in the future or provided by another type of provider. They need to be aware of what other sort of competition there may be for service providers,” Hutchison says.
Charles Dailey, Vice President of ASD Management says that when considering value for the long-term in the sense of an Ambulatory Surgery Center (ASC), the first thing to consider is whether or not the business proposition is something that is a need in the current market.
“One must identify that there is a business need. Verify that there is an outpatient surgical demand for the chosen ASC location. Is the business there? Is the volume of outpatient surgical cases there? Will the project support enough volume to carry the center financially? A premarital analysis should review volume as well as review the different type of outpatient surgical cases that various disciplines would support,” Dailey says.
According to Dailey, different types of outpatient cases have different values in regards to profit. One must look at the complete mix of volume to determine financial sustainability.
Dailey says that prospective owners must also pay attention to business dynamics of the area. Are the physicians in need of a new outpatient surgical facility? Is there current competition from other single day surgery facilities? These are some questions that need to be considered.
“If the market is already flooded, it would not make sense to develop another location. To take it a step further, the location should support a hospital or health systems in that geography. A new project must factor in the outpatient surgical services already provided by the hospital. Also consider approaching the hospital to determine interest with participation,” he says, emphasizing that there are many factors to consider when even thinking about starting a long-term healthcare business.
“If an initial market review supports the parameters mentioned above, the project has merit. This will not determine long term success of the facility. The next projection phase would be to develop a business plan which would incorporate long term goals. Last, it is important to note that operational management will be very important to ensure an efficient and profitable ASC.”
Pay Attention to the Business Lifecycle
As in all things in life, there is a cycle that a business goes through where important events can and will occur. The lifecycle of a business is: development, startup, growth, expansion/rapid growth, and maturity.
During the various stages of the lifecycle of an ASC, Dailey says that owners need to consider the case volume, the different types of cases, then focus on evaluating payor contracts in the area.
“Contracting is key to the success of the ASC. After syndication and also the credentialing process, operations should begin,” Dailey says.
The next phase to support a successful ASC highlights measuring cases based on efficiency.
“Are these cases scheduled to create the most sufficient work flow in a surgery center? Another example of measure is the amount of time for room turnover. Pre-op and post-op times are another measure. These are just a few examples. constant review serves to support a commitment to providing quality healthcare at the most efficient pace possible,” he says.
Dailey says that by doing those fundamental operational competencies, the ASC business will grow. The more efficient a center is, the more cases the business is going to support.
Dailey believes a facility should always be in “business development mode,”meaning, always looking for business (physicians who would be interested in performing their outpatient cases at the facility). The current ASC business should speak for itself and the physicians be satisfied with the quality of care provided. Dailey says that hopefully the physician base would spread “the word” to their other physician colleagues.
“During the operations phase, management should always be searching to conduct business in the least expensive way possible. Management should constantly review cost of goods purchased to ensure that the facility is getting quality products at the best price possible. ASC facilities should constantly look for where the ASC can save money without compromising the quality healthcare,” Dailey says.
Pedro Moore, Executive Director of the Delaware Innovation Fund says that before examining the lifecycle of the business, an owner needs to make sure that they have a growth plan in place, which will focus on increasing value and controlling expenses, as well as a sound exit strategy.
“Early stages, the focus is on growth, so profitability may suffer a little during the first few couple of years. However, as the company begins to mature, it should become profitable, and then focus on increasing profitability,” Moore says.
Hutchison states that obviously, during the development/startup phases, things like expenses are important to pay attention to.
“Then, as you mature, you want to become a dynamic business that pays attention to other opportunities. This includes opportunities to expand, diversify, enter other markets. Those are things that you want to be paying attention to as your business is maturing. Then, when you get to even later stages of maturity, what you want to be paying attention to is making sure that your business is sound and will be for a long time, especially when you are considering participation in an acquisition,” he says.
“On the startup, the most important aspect of planning is financial planning. You really need to be doing a good job at looking at your predicted revenue and expenses. Then you need to take that plan and use that as a strategy guide for your business as it gets to the level of a more stable operating environment.”
Hutchison explains that the goal should be to use the plan to set one’s business up to be in a position to be acquired. He says that a business that is financially healthy and has growth prospects, are an obvious choice for prospective buyers seeking an acquisition.
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.