The Haves and Have-nots: Positioning Your Healthcare Businesses for Maximum Value from Private Equity Investors

By Michael White, managing director for the healthcare practice at Founders Advisors

As we enter the second quarter of 2022, the hope that the worst of the COVID-19 pandemic is behind us continues to build. Obviously, healthcare has been deeply affected by the pandemic in multiple ways. With stronger vaccines and potentially weaker COVID variants, there’s an anticipation that the future looks brighter for the healthcare industry — and perhaps you’re thinking now is the time to consider selling your healthcare business for optimum value. 

Last year, I wrote here about navigating the private equity process for physician practices and I would like to dive deeper into what I believe are some of the strongest tactics to position your healthcare business for maximum value and attractiveness to private equity.

It’s important to understand that the biggest factor affecting private business valuations right now has been the growth of the funds for investment by private equity firms in recent years. There is a tremendous amount of competition for assets of all sizes, leading to sale processes that are more competitive on the buyer side. This creates a universe of “haves” and “have nots” and puts more pressure on the companies that are deemed to be in the latter category.

Positioning yourself as one of the “haves” is crucial to making your business as attractive as possible to potential buyers. With that in mind, here are five areas to help position your company as one of the “haves” — and not one of the “have nots.”

Size, growth and profitability

Lack of size and scale are among the most common reasons that investors pass on an investment opportunity. Scale can also impact valuation because investors are willing to pay premiums for companies that have been established as leaders in their space.

Finding the right balance between growth and profit is essential. Improving attractiveness of a business to potential investors would include action steps such as ensuring that no physician accounts for too much of the production in a practice and increasing the revenue per physician without adding additional fixed costs to the practice.

The same premise holds for non-physician-based healthcare businesses and ensuring no customer accounts for an inordinate amount of revenue or profitability.

Market share, market size and competitive differentiation

Investors want to be where the opportunities are, and that’s in growing markets. They look first at the markets where they want to be in, then identify the ideal targets within them. Like home buyers, they target the best neighborhood before determining the home that they’ll buy, and even if your company is performing well, buyers may pass if your market is shrinking. 

Investors are looking for tailwinds, not headwinds. You will have more interest from investors and lenders when your business has a large addressable market with good growth and is developing consistent sources of revenue. 

In addition, a sure competitive advantage is showing historical proof of taking market share at above average returns with demonstrated sustainability. Buyers look, and pay more, for companies with well-defined moats – i.e., barriers to entry – created by a company’s superior performance. Investors are buying the future and want to know that your company can continue to dominate the market due to one or more competitive advantages.

Sales and Marketing

The distinction between a formal and an informal pipeline is simple: a formal pipeline documents what is real and verifiable, while an informal pipeline reflects hope. Investors want to know that you can articulate the tactics and activities that result in predictable sales. A great sales system defines prospects, yields critical customer data, and most importantly, predicts revenue accurately. Buyers and investors pay substantially more for businesses that have documented sales processes and reliable pipelines. 

Begin tracing one or two sales metrics by sales representatives and review them often. Also, update your sales compensation plan to align with sales and profitability goals. 

Market your story by telling it often and to the right people. Are you reaching your core audience and are they responding to the message? If a new prospect hears your story and wants to learn more, you have a good marketing message that can convert to sales. But if you don’t tell it often, well and to the right people, you are limiting your growth. Buyers and investors look for companies that make an effort to be known, not those waiting to be found.

Operations and Customer Satisfaction KPIs

We can’t improve what we don’t measure so reviewing the right Key Performance Indicators (KPIs) on a regular basis helps you and potential buyers understand how your company is performing. Another great way to know how you are performing is to ask those you serve. Good companies don’t wait for their customers to tell them something is wrong. Instead, they seek their input and address their opinions and concerns in a meaningful and timely fashion.

Owners who don’t carefully listen to customers in real time and respond quickly to their needs can’t build sustainable companies that institutional buyers will value.

Accounting, financial management and human resources

Poor financial record keeping and failure to use financial data damage operational efficiency and therefore negatively impact your company’s appeal to investors. Losing your grip on financial matters also hinders your ability to make informed decisions related to managing a growing company.  Disarray of financial records will make selling your company to institutional quality investors nearly impossible. 

Employee recruiting and retention are also worthy of serious attention. Most businesses cannot scale without the right people in the right seats. When a great company is loaded with great people, they don’t have to be micromanaged – they just have to be motivated and pointed toward a worthy goal. Hiring great people begins with a well-defined recruiting and hiring strategy, and retention is about taking care of them. Buyers will adjust their terms up or down depending on the quality of your team.

It’s still a little early to see how COVID-19 potentially becoming endemic filters through to healthcare companies and how it will ultimately affect the sale process. That’s exactly why, for the foreseeable future, businesses should concentrate on historical results and how to best prove them to private equity groups.

A process that involves clear documentation of KPIs that you’re able to track and processes put in place to document those performances are what will separate your “have” companies from the lesser “have-not” businesses. It’s also what will attract the cash that’s been accumulated by private equity recently and invite the best possible price for your practice.

About Michael White

Michael White is managing director for the healthcare practice of Founders Advisors, a merger, acquisition and strategic advisory firm focused on serving middle-market companies across the nation in the healthcare, technology, business services, consumer, energy and industrial industries. Michael has more than 20 years of experience advising healthcare clients on a range of strategic alternatives, including IPOs, public and private equity and debt capital raises, joint ventures, licensing and buy-side and sell-side mergers and acquisitions. In order to provide securities-related services discussed herein, certain principals of Founders Advisors are licensed with Founders M&A Advisory, LLC, member of FINRA & SiPC. Founders M&A Advisory is a wholly-owned subsidiary of Founders Advisors. Neither Founders M&A Advisory nor Founders Advisors provide investment advice.