All About Healthcare Business Valuation – Improve Your Investment
Whether you want to sell your healthcare business or boost its growth, an accurate business valuation can give you exceptional insights for strategic planning, investing, financing, or exiting.
So, should you hire a reputed valuation company?
Not really. Working with a large valuation firm can be counterintuitive for a smaller healthcare business. If the firm serves too many clients, you might spend too much, wait too long for results, or get an inaccurate assessment if they rush through it.
However, when you work with us at Exitwise, we help you build the best team of M&A experts in the industry for a faster healthcare business valuation that’s done accurately and at a fair total price.
Schedule a consultation with us today to hire your dream M&A team!
What is Healthcare Business Valuation?
A healthcare business valuation is the process of determining the worth of a healthcare entity, such as a clinic or hospital.
While firms conduct most valuations in the industry, you may come across individual professionals. Your choice between a firm or individual mainly depends on the size of your entity and the purpose of the valuation.
Importance of Accurate Healthcare Business Valuation for Growth
Getting an accurate healthcare business valuation can enhance growth in different ways:
Data-Driven Decisions: High-quality data can help you make informed decisions about maximizing business value, financing options, expansion strategies, and general business planning.
Securing Better M&A Deals: With an accurate valuation, you can negotiate fair terms and pricing in an M&A process to ensure you don't leave money on the table. You also avoid overcharging and potentially scaring away willing buyers.
Boosting Investor and Stakeholder Confidence: Accuracy and transparency in the valuation process can build trust with employees, investors, and other stakeholders. They can be more willing to work or invest more in the business.
Types of Healthcare Valuation
Healthcare valuations fall under different categories, depending on the type of entity under consideration.
Here are the most common ones:
Hospital Valuation
As the name suggests, this valuation assesses and assigns a value to a hospital.
The process can be lengthy and complex, considering the quality of care, range of services or specialties, service demand, market share, and payer mix, among other factors.
Healthcare Asset Appraisal
A healthcare asset appraisal is a valuation that determines the worth of a healthcare entity's assets and equipment. You may need the appraisal to insure or sell your assets or if you are in the process of selling a business.
Valuation for Healthcare Practices and Facilities
This business valuation covers any healthcare entity that provides health services and care to its clients, such as hospitals, nursing homes, ambulatory care centers, clinics, physician practices, and more.
Factors That Impact Healthcare Business Valuation
The below factors can influence your healthcare business valuation:
Financial Health
Valuers and buyers consider your revenues and profit margins. If you have high revenue, you are more likely to get a higher valuation as it indicates the effectiveness of your business's sales and marketing efforts.
A higher profit margin shows that your business generates more cash from its operations. Buyers and valuers can see how long it would take to recoup investment. You can receive a higher valuation if you have high profit margins.
However, valuers might find the profits unsustainable if the margin is too big. You may not be investing in infrastructure, paying your staff properly, or planning for long-term growth. If this is the case, your valuation can be lower.
Business Location
The state and exact location where you operate your healthcare business can increase or decrease your value.
Valuers look at aspects such as the location's friendliness to businesses, availability of affordable labor, and local reimbursement rates.
If the location isn't business-friendly, has low reimbursement rates, or has a high cost of healthcare labor, you can expect a lower valuation range.
Quality of Staff and Staff Tenure
Having more high-value staff, such as medical doctors, can help you get a better valuation range.
Since most healthcare companies usually struggle to recruit and retain workers, you can get a higher valuation if you show job longevity, the ability to hire effectively, and employee satisfaction.
Patient Volume
A healthcare business with a high volume of patients can be valued higher. More patients usually mean more services offered, which means higher revenues and potential profits.
Top Healthcare Valuation Firms
If you want to discover your business's worth, you can consider healthcare valuation firms such as Carnahan Group, FTI Consulting, and KPMG.
Let's take a quick look at each service provider:
Carnahan Group
As one of the best valuation companies, Carnahan Group focuses heavily on the healthcare industry and assesses the fair market value of healthcare entities using the cost and/or income approach.
The company can help with market research, due diligence, reimbursement reviews, and hospital valuations for acquisitions and Stark/Anti-Kickback compliance.
FTI Consulting
With FTI Consulting, you can expect healthcare business valuations for strategic planning, regulatory compliance, litigation or arbitration support, transaction planning, and financial reporting.
The team provides valuations for hospitals and health systems, urgent care centers, home health and hospice companies, physician practices, and more.
KPMG
KPMG offers valuation services that have helped the most reputable and largest healthcare providers navigate complex transactions.
The company offers business valuations, pre-deal pricing, purchase price allocations, and business modeling.
KPMG can help you with fair market valuations for uses such as Stark Law and Federal Anti-Kickback compliance, tax reporting, M&A due diligence, and financial reporting.
How to Choose the Right Healthcare Valuation Firm
Choosing the right healthcare valuation firm can be easy if you know what to look for:
Specialization and Sub-Sector Expertise: Since the healthcare industry features many types of businesses, you'll want a firm that offers valuations within your subsector. For example, if you run a hospital, look for a company that evaluates hospitals more than home-based medical services.
Hands-on Approach: You can achieve better results working with a firm that uses a personalized, hands-on approach. The valuers can better understand you, your business goals, and the business, leading to a more practical process and results.
Willingness to Defend the Valuation: Your valuation firm should be willing to justify and defend its business valuation if needed. A defense may be necessary when negotiating the sale price in an M&A process, legal proceedings, or tax cases with the IRS.
Selecting a valuation firm can be easy but may not always get you what you want. On the other hand, creating your own team of experts gets you a higher chance of success. At Exitwise, we can help you find, interview, hire, and manage the best M&A experts.
We can connect you with wealth advisors, finance accountants, investment bankers, and business appraisers to help you evaluate your business.
These experts can align the valuation with your goals, whether you want to grow, finance, or sell your business.
Connect with us to connect with the best M&A experts in the healthcare industry.
Healthcare Business Valuation Methodologies
Now, let’s look at the three key methods valuators use to evaluate healthcare business:
1. Discounted Cash Flow Method
As an income-based approach, the discounted cash flow (DCF) considers the expected future cash flows and uses a predetermined, market-derived rate to discount them to their present value.
The method uses the formula below:
Total DCF or PV = CF₁ ÷ (1 + r)¹ + CF₂ ÷ (1 + r)² + … + CFₙ ÷ (1 + r)ⁿ
In this formula,
PV = The value of the business now
CF₁ = Annual cash flow for Year 1, and so on
r = Discount rate (the projected ROI rate, which shows the risk involved)
n = Number of years in the projection
In an exit valuation, the DCF valuation may also include the terminal value (TV), which is the estimated value of the business at the end of the projection period.
Here’s a quick example of a healthcare business with the following metrics:
Year 1 CF: $120,000
Year 2 CF: $140,000
Year 3 CF: $160,000
Discount rate: 10%
Using the DCF formula, let’s calculate the present value of the business:
Present value (PV) = $120,000 ÷ (1.1)^1 + $140,000 ÷ (1.1)^2 + $160,000 ÷ (1.1)^3
= $109,090 + $115,702 + $120,210 = $345,002
The current value of the business would be $345,002.
2. EBITDA Multiple
Valuers use this market-based multiple to show how many times a business is worth its EBITDA, which is its earnings before interest, taxes, depreciation, and amortization.
According to a 2024 First Page Sage report on healthcare EBITDA multiples, hospitals have a 6.1x—9.8x rate.
Going by this data and assuming your business has $7M in EBITDA, its value would be:
Business value = EBITDA x Multiple
= $7,000,000 x 9.8 = $68,600,000
Valuers prefer the EBITDA multiple for healthcare businesses as it captures a business's operational performance and profitability.
The method easily shows a business's ability to generate reliable cash flows from its operations, regardless of its capital structure (debt-to-equity ratio).
You can also check out the free Exitwise valuation calculator for a real-time estimate of your business's worth based on its EBITDA or revenue.
3. Net Assets Method
Here's the formula for the asset-based, net assets method:
Business Value = Net assets (at market value) - Net liabilities (at market value)
If your healthcare business has $7M in net assets and $1.5M in net liabilities, its value is $5.5M.
The asset-based model is ideal because most healthcare businesses usually don't have high profits yet but have most of their value glued to their total assets and liabilities.
Healthcare Valuation for Different Purposes
You can use a healthcare business valuation for various purposes.
Let's check out some common applications below:
Valuation for Sale or Acquisition
Most valuations are done when it's time to sell the business to retire, explore other opportunities in the same market, or exit the market fully.
For the buy-side, an acquisition valuation helps discover the worth of a target business to ensure the buyer receives a good deal that will offer returns on investment as soon as possible.
Valuations for Mergers
In the true sense of a merger of equals, two or more combining entities require valuations to determine their worth before the integration.
Each entity can see the other's value to determine if they are roughly the same and can benefit mutually from combining their assets, operations, customers, and other resources.
Valuations for Investment and Financing
As a healthcare business owner, you may require a valuation to help you acquire funding.
Lenders and investors usually request a detailed valuation report to determine whether your business is worth lending money to or investing in based on its financial health, market share, customer concentration, and other factors.
Frequently Asked Questions (FAQs)
Let's wrap up with a few additional questions regarding healthcare business valuations:
What Are Healthcare Appraisers?
Healthcare appraisers are professional individuals or companies that offer valuation services to businesses in the healthcare industry.
Depending on your needs, they can evaluate your entire healthcare entity or its parts, such as medical equipment. They offer valuations for practices, hospitals, clinics, senior living facilities, pharmaceuticals, or even home health agencies for sale.
How Can Healthcare Valuation Firms Help in Mergers and Acquisitions?
Healthcare valuation firms can help in mergers and acquisitions in ways such as:
Reaching an accurate and agreeable valuation of the target company in an acquisition or all the combining companies in a merger.
Assessing the strengths and weaknesses of your business to see how you can maximize value.
Setting and negotiating an ideal sale price for your business.
Identifying potential synergies the merger or acquisition could offer, such as cost savings or revenue growth.
How Do Market Trends Influence Healthcare Business Valuation?
Prevailing market trends can lead to a higher or lower business valuation. The valuation can be higher if the market is on an upward trend and demand is high for healthcare businesses.
Additionally, increased patient volumes, better payer mix, and technological advancement can lead to higher valuations.
Conclusion
When it comes to a healthcare business valuation, you can choose a valuation firm. However, if your business is smaller, you could be better off working with individual professionals.
At Exitwise, we can help you hire and work with the best M&A experts, including wealth advisors, business appraisers, finance accountants, and investment bankers.
We connect you with experts who can help you accurately value your business, find ways to increase its value, and even sell it at the best price possible if you are looking to exit.
Let us help you hire your dream M&A experts today!
