Healthcare M&A Insights

Commentary:

In the last edition of our Monthly Insights, we provided guidance on four steps to follow when pursuing an outright sale or capital raise to maximize value. In this edition, we continue to build on that theme by offering some company-specific value drivers for healthcare organizations.

These five value drivers are based on our experience of what strategic and financial (private equity) buyers consider or emphasize when evaluating an appropriate valuation to place on a target. The more a company has of these factors, the more likely a company is to achieve a premium valuation.

1.Scale

Scale demonstrates a successful model that is working well and has likely been built over time. Size helps mitigate risk and volatility.  There is also scarcity value to scale as there are fewer scaled players in healthcare’s highly fragmented sectors. Buyers also typically believe it is easier to buy vs. build scaled businesses.   

2. Payer Mix

Payer Mix is important as it can indicate favorable or unfavorable reimbursement rates and the likely stability of a company’s revenue stream.  Typically, the market favors a commercial insurance mix as it provides for higher reimbursement rates and does not share the risk of CMS rate cuts that come with Medicare and Medicaid.

3. Margin

Margin is somewhat a “Goldilocks” factor where it needs to be “just right”.  Too high of a margin can be a red flag that appropriate staffing levels are not being achieved and clinical quality is suffering.  Alternatively, if margin is too low, it is an indicator of poor operational efficiency, and the new buyer will need to expend significant resources improving margin.

4. Diversification

Organizations with many service lines mitigate risk by providing a variety of focus areas that can offset each other when times become volatile.  It also represents the availability of multiple growth levers that can drive additional revenue opportunities.

5. Growth Rate

A company’s growth rate is an excellent indicator of strong upside.  It can also create the perception of a management team executing on well thought out strategic plans with substantial white space to capture additional market share.

Our active healthcare deal flow and our processes are designed to create competitive tension; highlight the critical factors that drive value in the market and are aimed at increasing a buyer’s willingness to pay premium multiples for our clients. If you are a healthcare business owner and would like to have a confidential discussion on your specific strategic options, please feel free to reach out to one of our healthcare team members directly.