Working Capital and the Impact on Your Healthcare Business

industryWhen valuing one’s healthcare business, one of the key aspects of the value of the company is working capital.  According to Mark Dietrich, CPA, working capital is the spread between current assets and current liabilities of a business. According to Dietrich, when valuing healthcare entities, typically the working capital requirement is expressed as a function of a certain number of days collected revenue in accounts receivable.

When selling your business, a buyer will examine accounts receivable in order to determine how much cash they will have to put into the business to keep it successfully running.  The sufficiency of a business’ working capital could very well determine the overall value of your business to the prospective buyer.

Dietrich says when determining the sufficiency a business there are two things that will be examined.

“One, you look at the historical accounts receivable and then you determine how many days of collected revenue that that accounts receivable represents.  Say for example, it was 25 days.  Then you would compare that 25 days to industry norms for that particular type of a healthcare entity,” Dietrich says.

“Step two, you would look and see what the accounts or trade payables are, the amount of money that is owed to vendors, or any other similar type of liability.

For example if you were valuing an imaging center, the trade payables would include things for maintenance contracts that might be payable or contrast for MRI or CT, film that is used in conventional X-rays…all of that kind of stuff.”

Bill Capps, chairman of the corporate department at the law firm Jeffer, Mangels, Butler & Mitchell uses an ASC as an example when discussing how working capital works in outpatient care.

“They are typically owned by the doctors who are actually using the facility.  If you think about that, you will say to yourself that at that point, your working capital is required to support the rent of the facility, the replacement of equipment and the non-owner component of the business,” Capps says.

“However, for the doctor component of the business, for those who own a piece of the action, basically they are going to come in and perform a surgery, and maybe they are going to get paid something in advance, or maybe they are going to wait for insurance to pay.  That would have a different working capital requirement than in a facility where the docs were getting paid at the same time that a procedure was occurring or were in fact employed by the center.”

Capps goes on to explain what is not considered as working capital in a healthcare business.  Capps says that when looking at the financial statements of the business, one will usually see some line items for equipment, supplies, real estate leases and so forth.  Typically, the working capital is not involved in the capital equipment.  Instead working capital is the money in the till that is used to pay the ongoing expenses of the business over a period of time, Capps says.

“If you thought about it from the standpoint of a restaurant or similar business, you have the money that you have to pay the workers in your business for the next payrolls until receivables or income has been collected as well as other payments.  But the capital equipment that you own is usually depreciated over a longer period of time.  Let’s say you bought a million dollar piece of equipment, you might be depreciating it 200,000 dollars a year over a five year period,” Capps says.

According to Capps, this type of investment is not really working capital in the traditional sense for the business, it is considered part of the capitalization of the business.

“When you did your syndication and got your doctors to invest in your facility, the money that they contributed to the business, a portion of that was used to buy the equipment, and portion of that was to get the lease paid for,” Capps says.

Capps says that a common sense way to think about working capital is to consider it the gasoline in the gas tank when an automobile is sold. If the business is sold with an empty tank, the buyer will have to account for this in the purchase price because the gas tank will need to be filled in order to make the automobile run.

Liabilities and Assets

Dietrich says that as far as liabilities in working capital, trade payables would be the principal liability.

“You could also have payroll accruals.  For example, let’s say you were paying your employees once a month on the fifth day of the following month.  At the end of any given month you are going to have a liability for a month’s worth of payroll,” Dietrich says.

Curtis Bernstein, principal at Pinnacle Healthcare Consulting says when looking at liabilities working capital is the business’ current obligation, and it is very common for some of the smaller healthcare entities and even some of the larger entities that are privately owned to keep financial statements on a cash basis, so their liabilities are generally not recorded on their balance sheet.

“So accounts payable, for example would not be on a balance sheet, but there will be expenses that are incurred in the past that are due and may still be outstanding.  Accounts payable are your basic, everyday bills like your electricity, your rent, your property taxes or other obligations paid over the years,” Bernstein says.

According to Bernstein as entities start to take on risk bearing contracts, a liability that was common in the 1990s is now becoming more common place.  This liability is the incurred but not reported liability under capitation contracts.  These liabilities are the result of receiving a per member reimbursement that covers a period that as not elapsed at the reporting period.  If payor contracts are going to be assigned through the transaction, this liability must be calculated.

According to Bernstein, from a valuation standpoint, valuing a business when examining working capital means there are two ways that the transaction can go.

“That is, with the working capital where the working capital is transferred.  That might happen if the deal is a stock transaction. With or without can be done if the transaction is an asset purchase, but the most common way is without working capital,” Bernstein says.

“So, what that really means is, are you selling the business with the ability to bring in money in the short term to support the operations.  Are you going to have any cash?  It is pretty common for cash to not be transferred on a sale, whether it is a stock or an asset purchase.”

Bernstein says that it is also important to determine if there is going to be any accounts receivable to collect on.  In a healthcare business, accounts receivables can take 30 days, 60 days, 90 days, depending on the payor to be paid.

“So if you are selling the business without working capital, you are going to have people that are going to be providing a service and there is going to be payroll due to those people.  Without the working  capital you won’t have accounts receivable to collect on to pay those people,” Bernstein says.

“If you sell with accounts receivable, then you have that working capital, that money continues to come in the door and you pay employees.  Without the pre-paid expenses that you paid at the beginning of the year, that money has to come out of a buyer’s pocket to fund the company up until a point where working capital can support future operations.”


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

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