introduction to valuation in a healthcare setting · 2019-05-08 · •barriers to entry for...

Introduction to Valuation in a

Healthcare Setting

Healthcare HelpingsMay 1, 2019

Joshua Hedrick, MBA, CVA

Prepared By Kraft Analytics, LLC Proprietary and Confidential

Speaker Introduction

2Prepared By Kraft Analytics, LLC Proprietary and Confidential

Joshua HedrickMBA, CVA

Senior Manager

Kraft Analytics, LLC

3

Transaction Advisory

LOI Closing

PreliminaryValuation andDeal Pricing

RevisedValuation andDeal Pricing

Final Valuation, Deal Pricing andAdjustments

• Closing Balance Sheet• Working Capital and other Purchase

Price Adjustments• Purchase Price Allocation• Impairment Testing

Due Diligence & Legal

Deal Negotiation & Financing

Target Identification Transaction Accounting

Litigation

Prepared by Kraft Analytics, LLCProprietary and Confidential

Personal Goodwill

Succession Planning

Overview

I. Introduction to Value

II. Value Drivers

III. Measuring Value


Valuation is an art and a science.


Introduction to Value

“Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks.- Warren Buffet, 2008 Chairman’s Letter

6Prepared by Kraft Analytics, LLCProprietary and Confidential

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“Is it a 21 jewel movement or a 23 jewel movement?”

“Who carries a pocket watch?”

“Maybe it would make a nice gift for my dad.”

“It reminds me of my great uncle.”


Standards and Premises of Value


Investmentor Synergistic

Value

FairValue

FairMarket

Value

PREMISE OF VALUE

In-ExchangeForced

Liquidation

In-ExchangeOrderly

Liquidation

Assemblageof AssetsIn Place

Assemblageof Assets in

Continued Use

Standards and Premises of Value


Investmentor Synergistic

Value

FairValue

FairMarket

Value

PREMISE OF VALUE

In-ExchangeForced

Liquidation

In-ExchangeOrderly

Liquidation

Assemblageof AssetsIn Place

Assemblageof Assets in

Continued Use

Seller WantTo Get

Buyers WantTo Pay

Synergistic Value

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Revenue Synergies

• Cross-selling• Footprint• Access to IP

Cost Synergies

• Economies of scale• Supply chain efficiencies• Patents

Financial Synergies

• Access to more or cheaper capital

• Tax benefits

Market Synergies

• Increased category power / influence

• Elimination of rival

Fair Market Value



Value Drivers

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Value = CFn

(1 + r)n

Time• Cash Flows

• Operational• Terminal

Valuation Drivers


• Growth Factors• Overall Market - Growth / Size• Proprietary Protection for Company• Barriers to Entry for Competitors• Margin Maintenance or Growth Expectations • Opportunities to Realize Economies of Scale• Access to Distribution / Distribution Strategy

• Risk Factors• Relative Certainty of Future Cash Flows• Dependencies – Key Man, Suppliers, Customer• Market Forces - Direct Competition, Substitute Offerings, etc.• Political and Regulatory Factors• Obsolescence• Macroeconomic Forces

Value Drivers


One-Time Recurring

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Risk

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SAAS

Financial Consulting

Goodwill

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Enterprise Personal

“A business’s reputation, patronage, and other intangible assets that are considered when appraising the business, esp. for purchase; the ability to earn income in excess of the income that would be expected from the business viewed as a mere collection of assets.”

- Black’s Law Dictionary

“that intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified.”

- The International Glossary of Business Valuation Prepared By KraftCPAs PLLCProprietary and Confidential

Value Drivers


Spa Services (e.g. Botox)

Aesthetician / Laser Treatments

Plastic Surgery

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One-Time RecurringRisk

Elective

Covered

Enterprise (vs. Personal) Goodwill


• Quality/Consistency• Brand Recognition

Necessary

• Focus on the common direction• Infrastructure to support mission

How to Achieve

• Mayo Clinic• Women’s Care Florida

Examples

• Scalable with less risk AND growth potential• Transferability of earnings

Impact on Earnings Quality

Leveraging Healthcare Extenders


• Oversight by physicians• Procedures aligned with skill level of provider

Necessary

• Have proper processes in place• Think of practice as a business, not a job

How to Achieve

• Dental• Urgent Care

Examples

• Scalable AND growth potential• Higher earnings as a % of collections

Impact on Earnings Quality


Measuring Value

Valuation Approaches

Asset Approach What are the individual pieces

worth?

Market Approach What have other buyers paid for

similar investments?

Income Approach What cash flows will be

generated in the future and what

are they worth today?

19Prepared by Kraft Analytics, LLCProprietary and Confidential

Asset Approach

• Adjusted net asset value• Typically start with value on books

• Assets/liabilities adjusted to market value

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Net Asset Value

Income Approach 101

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Current Value Interim Cash Flows (or Losses)

Exit Event

Future cash flows are discounted back to a current value using a discount rate, commonly referred to as the cost of capital (equity or weighted average).


Income-Based Methodologies

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Discounted Cash Flows (DCF) Analysis

Capitalization of Cash Flows

0 1 32 4 Terminal or Exit

4

Cas

h F

low

s ($

)

0 1 or Base

∞

Cas

h F

low

s ($

)DCF analysis may consider:• Capital structure shifts• One-time capital expenditures• Periods of elevated growth or

declines• Changes in profit margin

Assumes that the cash flow base grows (or declines) by a steady rate into perpetuity.


Common Multiples

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• Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)• Proforma, Adjusted Trailing-Twelve Months

• Historical Trailing-Twelve Months

• Forward Twelve Months

• Revenue

• Sellers Discretionary Earnings (SDE)• EBITDA + Compensation for 1 owner (other owner

compensation adjusted to market)

• Industry Specific (e.g. $ per Bed for Nursing Home or $ per Barrel for Beer Distributor)


Cap Rates and Multiples


𝑉𝑎𝑙𝑢𝑒 =𝐶𝐹(1 + 𝑔𝑠)

(𝑘 − 𝑔𝑙)= 𝐶𝐹(1 + 𝑔𝑠) ×

1

(𝑘 − 𝑔𝑙)

CapitalizationRate

Multiple

𝐶𝐹 = Cash Flow; typically adjusted orproforma

𝑔𝑠 = Short-Term Growth rate or the growth rate expected in the next period

𝑘 = Discount Rate or Cost of Capital𝑔𝑙 = Long-term Growth Rate or the

sustainable growth rate expectedinto perpetuity

Value is a function of risk and growth.

Multiple Example

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Trailing-Twelve Month EBITDA $ 1,000,000

+ Discretionary Expenses 25,000 e.g. season tickets, club memberships

+ One-Time Expenses 10,000 e.g. legal expenses related to lawsuits

+ Transaction Costs 5,000 e.g. accounting, legal

+ Owner Compensation 2,000,000 e.g. bonus, salary, perks

- Market Cost to Replace Owner (400,000) based on duties, reflects industry and geography

Adjusted EBITDA 2,640,000

Multiple 3

Operational Enterprise Value 7,920,000 total (equity + debt) value of a business' operations; generally includes fixed assets and intangibles

+/- Included Working Capital 50,000 sellers often retain cash and receivables

- Assumed Debt (250,000) sellers often retain debt

Transaction Price $ 7,720,000 Prepared by Kraft Analytics, LLCProprietary and Confidential

Market Approach

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•Comparable Transactions•Guideline Public Companies•Rules of Thumb

• What we use:• Pratt Stats• PitchBook• Business Reference Guide• Analyst Reports• Industry Insiders


Questions?

Joshua Hedrick(615) 782-4249

[email protected]


mailto:[email protected]

Upcoming Healthcare Helpings

• Topic and Date are TBD/Summer 2019 –more info to come…

Please be on the lookout for our follow-up email, click the link and complete the evaluation to receive

your CPE Credit. 28

introduction to valuation in a healthcare setting · 2019-05-08 · •barriers to entry for...

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