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Up, Up, and Away? Inflation, Shortages, and the Impact on Business Valuation Analyses

Up, Up, and Away? Inflation, Shortages, and the Impact on Business Valuation Analyses

  • September 13, 2022

You have likely heard a thing or two about the recent increases in inflation. With annual inflation rates reaching levels not seen in over 40 years, increasing prices seem to permeate almost every aspect of daily life. Some of the inflationary increases are related to the lingering effects of Covid-19 and shortages in staffing and supplies. Others are based on rising costs in the transportation of goods, while others are due to increased compensation of qualified personnel.

For businesses in the healthcare industry, the question remains: what will revenue and expenses look like tomorrow? That question becomes even more pronounced when a business is preparing for a transaction that includes a fair market value analysis.

Business valuation is often said to be both an art and a science. Meaning that every conclusion is reached using both qualitative and quantitative analyses. Certain qualitative assessments are especially critical when developing projected revenue and expenses for healthcare entities. In today’s unique economic environment, a thorough review of each revenue and expense line item is required to assess the future benefit stream used to determine the value conclusion.

Some questions for the valuation analyst to keep in mind when preparing a business valuation of a healthcare entity in today’s market include the following:

 

Revenue

  • Do the business’s contracts with third-party payers include an inflationary adjustment regularly, or are negotiated amounts set for the length of the contract?
  • When are renegotiations scheduled to take place with third-party payers? Is it within the projection period?
  • Is the business located within a region that has experienced significant changes in payer concentration? How will that impact the subject business in terms of anticipated revenue?
  • Have Medicaid enrollment rates changed in the local area?
  • Will the business be impacted by federal and state efforts to reduce the overall cost of healthcare in the United States?
  • Are technological advancements allowing for changes in the way healthcare services are provided? For hospitals and ambulatory surgery centers (ASCs), this could include changes in procedures on the CMS inpatient-only list.

 

Expenses

  • Has the business experienced staffing shortages in the recent past?
  • Are salaries and wages expected to increase during the projection period, either in response to market demands or recruitment of new personnel?
  • Will the business continue to offer its staff the same level of benefits?
  • Has the business been impacted by any supply shortages that are expected to be resolved within the projection period?
  • Is the business located in an area with increasing rental rates?
  • Are state-level corporate taxes scheduled to change during the projection period? Numerous states have recently enacted phased changes to tax rates that are scheduled to be implemented over a period of time.

 

Capital Replacement

  • Has the business deferred any necessary capital investments that will need to be accounted for in the valuation analysis?
  • Is the capital replacement amount impacted by any changes in deduction protocols for tax purposes?

 

A qualified valuation analyst should be able to discuss these and other questions with management. The world of healthcare is full of nuances that require a familiarity with overall industry trends and ongoing initiatives among the major stakeholders within the healthcare industry. Coker Group has a long and established history of assisting with independent, fair market value analyses to support the transactions of various entity types. Our team of experienced certified valuators will provide a detailed independent analysis for each entity, resulting in a fair and defensible valuation conclusion.

 

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  • DENISE PARKER, CVA

    DENISE PARKER, CVA

    Senior Manager

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