by David Coit, DBA, CVA, CVGA, CM&AA, CBEC
Owners of healthcare companies, practices, and agencies often ask us how they can increase their businesses’ market value. Buyers determine the value of a business based on return on investment and riskiness of the investment. Business owners create value by increasing the return on investment and decreasing the riskiness of ownership.
Business owners can take steps to increase long-term value, increase short-term value, or both. The value-building steps that owners should take will depend on their exit strategy time horizon. In either case, owners may consider adopting an investor/owner mindset to attempt to view their business through an investor/buyer’s eyes.
Some owners mistakenly assume that their business’s value relates to the amount of dollars reinvested in the business. Reinvested dollars only create value if the reinvestment increases cash flow to the owner. Buyers focus on the amount of excess/risk-adjusted cash flow a business would provide them. In this column, we’ll first look at ways to increase net cash flow to the owners. We’ll then look at ways owners can decrease the riskiness of their business before concluding with a discussion about some of the key attributes that buyers are looking for in companies.
Ways to Increase Cash Flow to Owners :
- Increase Revenue — Revenue growth is a key value driver. Moreover, historical revenue growth shows buyers the potential for future growth (i.e., “proof in the pudding”). However, revenue growth should not be at the cost of declining gross profit margins.
- Increase Profit Margins — Profit margins reflect the ability of an owner’s activity to make money. Focusing efforts on the products or services with the highest profit margins while reducing the company’s efforts on low-margin business lines is crucial to increasing cash flows.
- Pursue Growth Opportunities — Identify and capitalize on future growth opportunities. The healthcare sector is constantly evolving, which affords entrepreneurial owners expansion prospects.
- Segregate Customers — Separate highly profitable customers/patients from low-margin customers/patients and consider using outside providers to support low-margin customers/patients’ needs.
- Improve Operational Efficiency — If a business can increase its operating margin on existing assets, it will generate additional value. Owners should determine the industry average and top quartile operating margins and attempt to benchmark the top quartile. If cost-cutting measures are used to increase operating margins, be sure that the cost cutting does not result in a future increase in inefficiencies. By increasing wages, salaries, and technology expenses, owners may find increasing operational efficiencies and long-term operating profits.
- Optimize Use of Debt Financing — Use debt to finance for value-building activities, such as adding additional service lines, facilities expansion, enhanced marketing campaigns, and state-of-the-art technology.
- Be Willing to Consider Moving — If your current location is not optimal for long-term growth and access to quality labor, you might consider moving. An examination of the demographics of your market territory versus alternative areas might be worth undertaking.
- Develop a Five-Year Growth Plan — Begin by brainstorming a comprehensive list of potential ways you can think of to increase revenue. Next, evaluate and rank each idea based on potential revenue impact, amount of effort, and implementation cost. Finally, use the plan to align your staff around a common purpose and close the strategy execution gap.
- Develop a Strong Web Presence — Having an online presence helps spread the word of your healthcare services. Utilizing an effective paid advertising strategy can grow your visibility exponentially.
- Focus on Attracting Millennials — Depending on your service offerings, you might consider making efforts to attract millennials. Within two years, millennials are projected to make up half the income-earning population. By 2025, that figured is projected to reach 75%. Today, millennials are one of the country’s most important consumer segments.
Invest in an Enduring Brand — There is tremendous value of investing in your brand to drive long-term revenue growth. Your brand name becomes your brand’s calling card. Seeing your brand name and logo is often the first experience a customer/patient has with your business.
Ways to Decrease the Riskiness of Cash Flow to Owners :
- Achieve Recurring Revenue — Establishing or growing recurring revenue streams is critical. Recurring revenues are the portion of a company’s revenue expected to continue into the foreseeable future. Unlike one-off sales, these revenues are predictable, stable, and counted on to occur at regular intervals in the future with a relatively high degree of certainty.
- Secure Multiple Revenue Sources or Payors — Having multiple payors decreases risk by limiting the impact of reimbursement changes.
- Establish Multiple Suppliers and Contractors — Similarly, having multiple suppliers and contractors decreases the risk associated with supply chain problems and contractor issues. Working with multiple suppliers protects against the risk of interruption.
- Develop Accurate and Timely Financial Statements — By having well-timed financial reporting, you can better prepare your business and make sounder financial decisions to grow the business. Moreover, improved financial management allows you to focus on current financial matters while developing plans. Inaccurate financial statements will be discovered during buyer due diligence and will lead to a lower valuation or lost sale.
- Establish Strong Internal Systems and Controls — Internal controls are a business’s systems to manage risk and diminish fraud. Inadequate internal controls can lead to embezzlement, loss of intellectual property, and/or theft of proprietary data.
- Demonstrate a Predictable Business — A predictable company has a specific and intentional focus, a detailed yet straightforward execution plan, systems and processes that are optimized to support the plan, the right skills and reward system to execute the plan, and the constant gathering and analysis of data to drive continuous improvement.
- Track and Respond to Customer/Patient Online Complaints — Online patient reviews are growing more critical to healthcare organizations and their providers. In a study, 95% of patients indicated that they found physician reviews online to be reliable and more than 70% said reviews have influenced their choice of physician.
- Review All Contractual Agreements — A legal review of all existing contractual agreements can help ensure no surprises come up during a buyer review. For example, a near-term expiration of a property lease agreement could scuttle a business’s sale if the landlord has no interest in renewing the lease.
- Take Steps to Lower Employee Turnover — Business owners who focus their efforts on building employee engagement can create a positive working atmosphere, give employees a sense of pride in their work, and encourage people to stay, avoiding the negative impact of significant staff turnover.
Create Barriers to Entry — Barriers to entry include patents and special licenses, specialized skills, established brands, restrictive government regulations and laws, economies of scale, and high capital investment requirements.
Put Yourself in the Buyer’s Shoes
In our experience, the most crucial feature buyers are looking for in a company is profitable growth. Buyers want to know that they can take what you have built and build on it. But, in their risk/reward analysis, they’ll want to see that your strengths far outweigh your weaknesses (i.e., opportunities for improvement). Most buyers have a checklist mentality where they’ll be looking to see that your business has at least some of the following attributes:
- Diverse reimbursement/payors
- Strong reputation and quality of services
- Expansion in chronic disease management
- Keen understanding of the current and future required level of staffing
- Relevant certificate of need (CON) or other licensure requirements, where applicable
- Continued investment in infrastructure and actions to pursue efficiency opportunities
- Low revenue seasonality
- Large population base with the right client demographics
- Tenured, experienced workforce with low employee turnover
- Reliable and consistent referral sources and contracts with providers
- Clean billing audit
- Good revenue growth
- Strong operating margins
Whether you intend to sell your business this year, next year, or many years into the future, an integral component of your business plan should revolve around increasing company value. Not only will this help you secure a higher price when the time comes, but engaging in activities that increase value and decrease risk will improve the overall operations and short- and long-term performance of your business. If you have questions about what activities make the most sense for your business and efforts to enhance its value for an eventual sale, we’re here to help with more information on this and related topics. Contact us today!