Maximizing Value in Healthcare M&A Transactions

Introduction

When looking to maximize value in healthcare M&A transactions, it’s important to view your business from a potential buyer’s perspective. 

Investors seek to mitigate risk, so it is essential to present your business in a way that reduces any potential risks. Understanding what investors consider valuable can significantly increase your chances of getting the best price for your business. 

This blog will discuss four ways to maximize value when selling your healthcare business.

Streamline Systems and Processes

One of the first things you can do to maximize value in a sale is to streamline the systems and processes that underpin the company’s operations. 

Here are some essential steps sellers can take to maximize the value of their business by streamlining their systems and processes.

Conduct a thorough review of current operations

The first step in streamlining your business’s systems and processes is comprehensively reviewing your current operations. 

This review should identify inefficiencies, areas for improvement, and any bottlenecks hindering your business’s growth. You should also assess your business’s strengths, weaknesses, opportunities, and threats to identify areas to focus your efforts. We recommend looking at each cost item on your profit and loss statement as a percentage of revenue month over month and then comparing that against industry standards (something Agenda Health can assist with). 

Identify areas for improvement

Once you have completed your review, you should identify specific areas to streamline your systems and processes. This might include changing vendors, renegotiating contracts, reducing the number of steps in a process, automating repetitive tasks, or outsourcing non-core functions. The goal is to eliminate bottlenecks, reduce costs, and improve efficiency.

Identify areas for improvement and develop a detailed action plan with timelines, responsibilities, and metrics. Implement staff reorganization, new technology, or software solutions to streamline systems and processes and improve efficiency.

Monitor performance

After implementing changes, monitoring your business’s performance is important to ensure your systems and processes work as intended. You should establish performance metrics and regularly review them to ensure you achieve the desired results. If you are not achieving the desired results, you may need to revisit your action plan and make further changes. Specific metrics that buyers are interested in may vary from industry to industry; however, some of the crucial data points independent of your line of business include EBITDA, sources of revenue, referral source trends, and tracking of key costs.

Document processes and procedures

As you streamline your business’s systems and processes, it’s essential to document your new processes and procedures. 

This documentation will be welcomed during the due diligence when potential buyers want to review your operations in detail. Clear and detailed documentation will also make it easier for you to train new staff and ensure consistency in your operations.

Engage professional assistance

Finally, it may be helpful to engage the services of third-party professionals, such as healthcare consulting firms and/or CPAs, to help you streamline your business’s systems and processes. We are happy to provide access to our network of professionals who can provide valuable insights and guidance, particularly in financial and regulatory compliance.

Have consistent and predictable revenues

Having consistent and predictable revenues provides stability and assurance to potential buyers. Here are a few steps sellers can take to maximize the value of their business by ensuring that their revenues are consistent and predictable.

Invest in marketing and sales

A strong marketing and sales strategy can help you attract new customers, retain existing ones, and increase revenue over time. This can be achieved through various channels such as social media, email marketing, search engine optimization (SEO), and paid advertising. If you, as the owner, have been a major source of your company’s sales and marketing efforts, you should consider training others and imparting your skills to them; this will give buyers comfort in knowing that the success and future of the business doesn’t hinge solely on you, especially if you plan on exiting the business altogether after the sale.

Diversify your customer base

Relying on a small number of customers for most of your revenue can be risky as it increases the likelihood of losing a significant portion of your revenue if any of those customers decide to leave. By diversifying your customer base, you can reduce this risk and ensure a more stable revenue stream.

Focus on customer and employee retention

By focusing on customer and employee retention, you can reduce churn and ensure a stabilized revenue stream over the long term. This can be achieved through various strategies such as providing excellent customer service, finding creative ways to show loyalty, and creating a positive customer and workplace experience.

Establish recurring revenue streams

Establishing recurring revenue in healthcare isn’t always easy, but look to establish retainer agreements or recurring contracts if/when your industry allows. By creating recurring revenue streams, you can create predictable and consistent income and reduce the impact of fluctuations in customer demand.

Monitor and analyze key metrics

This includes customer acquisition costs, customer retention rates, customer lifetime value (CLTV), and average revenue per user (ARPU). By regularly monitoring and analyzing these metrics, you can identify areas for improvement and make data-driven decisions to improve your business’s revenue performance.

Develop a growth strategy

Developing a growth strategy includes identifying new market opportunities, developing new lines of services, and expanding into new geographic regions. By developing a growth strategy, you can create new revenue streams and reduce the impact of fluctuations in existing revenue streams.

By diversifying your customer base, investing in marketing and sales, focusing on customer retention, establishing recurring revenue streams, monitoring key metrics, and developing a growth strategy, you can create a stable and predictable revenue stream to make your business more attractive to potential buyers.

Demonstrate Growth Potential

A business that can demonstrate growth potential and present achievable growth plans is more likely to attract potential buyers and command a higher selling price. Demonstrating growth potential assures potential buyers that the business has a viable future and can continue to generate returns over the long term.

How to demonstrate growth potential

Here are some steps that sellers can take to demonstrate growth potential when preparing to sell their business:

1. Analyze market trends: Analyze market trends and identify areas of growth potential. Look for opportunities to expand into new markets, develop new services, or improve existing offerings.
2. Develop a growth plan: Develop a growth plan that outlines specific strategies for achieving growth. The growth plan should be realistic, achievable, and based on market research and analysis.
3. Highlight growth drivers: Highlight the key drivers of growth for the business. This might include a growing customer base, increasing demand for the business’s products or services, or the potential for expanding into new markets.
4. Present a track record of growth: Present a track record of growth over time. This might include revenue growth, increased profitability, expansion in number of referral sources or other key performance indicators demonstrating the business’s ability to grow and generate returns.
5. Identify key growth initiatives: Identify key growth initiatives that the business has already undertaken or plans to launch. This might include marketing, product development/new service offerings, or infrastructure investments expected to drive growth over time.

Understanding EBITDA and Calculating Adjusted EBITDA Margin

EBITDA vs Adjusted EBITDA

EBITDA margin is a financial metric that measures a company’s profitability by looking at its earnings before interest, taxes, depreciation, and amortization (EBITDA) as a percentage of its total revenue. It provides valuable insights into a company’s operational efficiency and cash flow generation. However, to get a more accurate picture of a company’s true profitability, it can be beneficial to calculate and analyze adjusted EBITDA, which considers certain expenses or non-recurring items that might distort the EBITDA margin.

Why Adjusted EBITDA Matters

Adjusted EBITDA allows businesses to account for specific expenses or events that may impact their financial performance, providing a clearer understanding of their underlying profitability. Adjusted EBITDA provides a more accurate representation of a company’s ongoing operations by excluding certain costs, such as one-time restructuring charges, non-operating expenses, or non-recurring events.

It is common practice for potential buyers to base their value of a business on a multiple of a company’s adjusted EBITDA. Depending on which line of business you’re in, the range of multiples that potential buyers are willing to pay may vary; however, across every industry, it is generally the case that a higher adjusted EBITDA will earn a higher multiple for the business. This means that the value a business can achieve in the market doesn’t increase/decrease in a linear fashion with its change in adjusted EBITDA, but rather in an exponential manner!

As a general example of the exponential change, a $500k adjusted EBITDA  may earn a 5x multiple, resulting in a $2.5M valuation, whereas a $1M adjusted EBITDA may earn a 6.5x multiple, resulting in a $6.5M valuation. While the adjusted EBITDA only increased by 100%, the valuation increased by 160%. Keep in mind that decreases in adjusted EBITDA have the same exponential effect but in the opposite direction.

Valuations from industry to industry constantly evolve, which is why partnering with Agenda Health can be crucial to help you calculate your adjusted EBITDA and the appropriate multiples to be expected as a result. 

Conclusion

Selling your business can be a daunting task. However, by focusing on these four categories, companies can decrease the perception of risk, attract greater interest from the market, and receive a higher sales price. 

Investors generally seek businesses with optimized operations, consistent revenue streams, growth potential, and robust financial health. By presenting your business in a way that reduces risk and increases potential, you can increase the value of your business and attract the best possible price. 

Selling your business requires time and effort, but by following these tips and enlisting an Agenda advisor to guide you, you can set yourself up for success.

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