One of the most common questions we are asked when we meet potential clients is how much do you think my healthcare business is really worth? Whilst one can never know the exact answer until one goes out to market, we have outlined some of the main factors that influence the value of privately owned healthcare companies.
How purchasers determine value: key approaches
Several methods are used to assess a healthcare business's worth:
• EBITDA multiples: This is the most common approach for profitable businesses. It involves multiplying your company's EBITDA (a proxy for how much cash the business is generating) by a relevant industry figure, usually based on observed listed comparable company valuations and precedent transactions. EBITDA x earnings multiple = valuation. Attention must be paid to both the multiple as well as the EBITDA it is applied to, and a good advisor can help present and justify adjustments to optimise this.
• Revenue multiples: Particularly useful for businesses with strong software components or recurring revenue (like subscription-based services), this method uses revenue, often Annual Recurring Revenue (ARR), as the base.
• Discounted cash flow (DCF) analysis: This method projects future cash flows and discounts them back to their present value, considering the associated risks. It requires detailed financial forecasting, and the discount rate used can have a very large bearing on the outcome.
• Replacement value: This estimates the cost of recreating your business's assets, both tangible and intangible, often serving as a minimum valuation. It will vary from purchaser to purchaser depending on their own resources, and time is a key factor that buyers weigh up when considering this.
• Net asset value (NAV): This calculates the difference between your business's assets and liabilities and is particularly relevant for asset-heavy businesses. Again, this is often considered a lower bound as it doesn’t imply any premium for the ongoing operations of the business.
What investors look for: key influences
Whilst the methodologies outlined above serve as a useful framework, ultimately valuing a business boils down to pricing risk and reward. It is important to be able to articulate the strengths and key selling points as well as addressing some of the perceived risks early in the process to avoid disappointment later. Whilst not exhaustive, below are a number of the key factors that healthcare investors focus on when assessing valuation:
• Regulatory compliance: Healthcare is heavily regulated, so strong compliance and ability to demonstrate a commitment to quality are essential. The last thing a purchaser wants is the business to be questioned by the regulators for endangering patients, so there exists a premium for quality.
• Revenue visibility: Businesses with strong revenue visibility, characterised by recurring revenue streams, long-term contracts, or a predictable customer base, are highly valued. This predictability reduces risk and allows for more accurate financial forecasting, enhancing investor confidence. By contrast, a business that is reliant on a single contract that is due for renewal is a risk that many buyers will be reluctant to take.
• Growth potential: Investors are ultimately looking for a return and thus prioritise businesses with strong growth prospects. Growth can be driven by market expansion and/or growing market share, which can be done both organically and through acquisition. A well-defined growth strategy mitigates perceived risk, enabling purchasers to justify a higher acquisition price.
• Healthy margins and scalability: Investors prioritise businesses with healthy, sustainable margins and that can scale efficiently. High margins indicate efficient operations and strong pricing power, whilst scalability suggests the potential for significant growth without proportional increases in costs, enhancing long-term value.
• Financial stability and normalised trading: Investors scrutinise historical financials for potential "cliff edges" (sudden performance drops) and seek assurance of normalised trading. This involves adjusting financials to reflect sustainable performance, excluding one-off events, ensuring valuation multiples are applied to a realistic earnings base.
• Strong management team: A capable and experienced team builds investor confidence. It also determines the potential purchaser universe that can be approached. Private equity for instance typically prefers to back a management team, and thus a founder without a credible succession plan is reducing the purchaser universe to trade buyers or investors with an alternative candidate in mind.
• High barriers to entry: Businesses with strong barriers to entry, such as proprietary technology, unique intellectual property, established brand recognition, or exclusive contracts, command higher valuations. These barriers protect market share and provide a sustainable competitive advantage, making the business more attractive to potential acquirors.
• Scale: Bigger businesses are valued at more of a premium compared to smaller businesses. There are a multitude of reasons for this, but the bottom line is that there are fewer large businesses, and there is more demand from buyers as they would rather invest their resources in doing one large deal compared to lots of smaller ones. It’s unfortunate but businesses delivering less than £1m EBITDA have a significantly smaller pool of potential buyers compared to a business generating £1m+ EBITDA.
An advisor’s role: positioning and competitive tension
How your business is presented and brought to market significantly affects its value. A well-positioned business with information that appropriately highlights its strengths and potential will almost certainly sell for more than a poorly prepared and articulated business.
Similarly, an advisor that can approach the right buyers and generate competitive tension will be able to negotiate and deliver better outcomes for the vendors. Ultimately whilst the valuation methods discussed are a useful framework, the final price is often driven by the purchaser's perceived strategic value and competitive landscape. The involvement of a good corporate finance advisor will often pay for itself many times over as they successfully position the business and orchestrate a situation that encourages a bidding war between suitors.
Conclusion:
Valuing a healthcare business is a complex process that requires understanding various methods, market dynamics, and the business's specific characteristics. Expert guidance, informed by market experience, is essential for achieving the best possible outcome. If you are considering selling your healthcare business and would like a confidential consultation to discuss what it might be worth, please get in touch.