by Gabriel Andrada, MHA, CSAF, CHBC, CVA
When it comes to valuing a healthcare business, the market approach is an important valuation method to consider. This method involves analyzing public company data and/or completed transactions of businesses that are comparable to the subject business. From this data one can calculate valuation multiples that can then be applied to the subject entity to arrive at an indication of value.
While the market approach should be considered in valuing healthcare businesses, this approach comes with various challenges and limitations that one should be aware of, including the following:
Lack of Available Data
Compared to other industries, healthcare transaction data is not as readily available. Despite the large volume of healthcare transactions that occur each year, many of these involve privately held businesses for which little or no public financial disclosure is required. This scarcity makes it challenging to find sufficient data to use.
Limited Details in Available Transaction Data
Even when comparable healthcare transactions are available, they often lack essential details necessary for accurate comparisons. For example, a reported transaction may omit the purchase price, or it may include no (or limited) financial information such as reported revenue, earnings, assets, etc. Moreover, while a transaction may report the price and associated multiples, the data may not specify whether the transaction price represents asset value, enterprise value, or equity value, or whether the price includes non-cash considerations, earnouts, contingent payments, etc. This missing information can significantly impact the appraiser’s ability to properly interpret and apply the data in the valuation process.
Lack of Standardization in Reported Transactions
Valuing healthcare businesses using a market approach becomes more complex due to the lack of standardization in reported transaction information across different sources. For instance, one database may exclusively report enterprise values, while another may focus on equity values. This lack of consistency makes it difficult to ensure accurate comparisons between transactions reported in differing transaction databases.
Variances in Data over Time
Like the stock market, values of businesses will change over time due to economic, industry, regulatory and other forces that come to prevail on the business. In addition to the limitations noted above, it may be difficult to directly compare pricing multiples from one time period to the next due to differences in these market forces. This is acutely problematic with transactions occurring during and immediately after the COVID-19 pandemic, which was marked by significant business disruption, population shifts, and massive amounts of government stimulus.
When valuing a healthcare business using the market approach, it is important to carefully evaluate both the benefits and the unique challenges that could arise. The limited availability of healthcare transaction data, lack of detailed information, and absence of standardization require cautious and meticulous attention to detail when processing a valuation. Finding comparable transactions that closely resemble the subject business is going to be essential. By being aware of these challenges and conducting thorough research, healthcare professionals can overcome the complexities of the market approach and arrive at more accurate valuations for their businesses.
At Root Valuation, we help physician leaders successfully navigate business and employment transactions to that their value is fully realized. Have a question about your physician practice valuation, contact us at firstname.lastname@example.org.