The healthcare reform, reimbursement pressures, increasing operating costs, and capital needs are stimulating merger and acquisition activities involving hospitals, medical groups, physicians, and other healthcare businesses to occur at a rapid pace. From initial strategic planning to the finalization of the transaction, and to post-transaction financial reporting, subject business valuation plays an integral role throughout the process. In today’s complex dynamic regulatory environment, it is important to obtain valuation guidance that can withstand scrutiny from a compliance standpoint. An accurate valuation is also required to accomplish the anticipated return on investment. Before selecting a valuator, here are some critical aspects to look for in high-quality valuation work.
- Due Diligence Review. A comprehensive operational and financial due diligence review plays a significant role in developing an accurate valuation opinion. Due diligence reviews involve on-site visit of the business, management interviews, and market research. This process sets the stage as it enables the valuator to understand better the various qualitative characteristics and quantitative factors influencing the value. Valuations that lack such an important component could over look certain issues and, thus, produce misleading results.
- Valuation Approaches. While business brokers and other intermediaries frequently use market transaction multiples to provide an early-on indication of transaction values, this approach is rarely relied upon in developing a formal valuation opinion of healthcare businesses, due to the lack of true comparables. Rather, the approach used most widely in healthcare business valuation is the income approach, in which the business value is estimated based on the expected future economic benefit stream to be generated by the subject entity and the anticipated risks. To use this approach correctly, the appraiser must consider a variety of factors including industry trends, reimbursement environment, competitive landscape, growth potential, capacity, and capital needs. It is also critical that the valuator has adequate knowledge in the healthcare regulatory environment to ensure compliance in this area.
- Post-transaction Arrangements. Post-transaction arrangements have a direct connection to the upfront purchase consideration paid for in a healthcare business transaction. Examples of these arrangements include post-transaction physician compensation, medical directorship, management service agreement, and clinical co-management agreement. It is important that the valuation takes into account the economic terms of these arrangements. Moreover, these arrangements and their economic terms should also be reviewed by a qualified healthcare valuator to ensure compliance.
- Timeliness of Data. A valuation has a limited useful life. Due to the dynamic healthcare environment, certain changes (e.g., reimbursement cuts) could have an immediate and material impact on valuation results. Thus, if the valuation is completed using outdated information (e.g., over a year old), it is recommended that the valuation be updated immediately before the contemplated transaction occurs.
While numerous consulting and CPA firms across the country provide valuation services, it is important that the valuation is performed by a certified/accredited and experienced business appraiser who has specialized knowledge in the key economic drivers, trends, niche healthcare issues, and the unique regulatory environment in the healthcare industry. Coker has completed hundreds of healthcare business valuations for potential transaction purposes. Coker’s dedicated healthcare valuation experts have extensive experience valuing businesses, service and compensation arrangements, tangible and intangible assets related to a broad range of healthcare entities and arrangements.
For more information about Coker’s business valuation services, please call 678.832.2021 to speak with Yong Zhang, ASA, CPA, Senior Manager or Justin Chamblee, CPA, Senior Vice President or fill out our contact form.