Preparing a Valuation
Christian Hoffmann, Associate Director, Mergers & Acquisitions, Nobility RCM
If you’re a business owner of a medical or dental billing company, at some point you may consider selling your company or growing your own business through acquisition. Proper valuation of the business is key to determining whether a transaction will have a successful outcome.
In order to accurately value a company, there are numerous components to consider:
Earnings and margins: Is your company profitable? Have there been historical fluctuations in profitability and can they be attributed to specific events, such as seasonality or loss of clients? Use your profit and loss statement to assess earnings and margins.
Growth year over year: Is top-line revenue growing? Is your cost to operate increasing or decreasing against top-line revenue? Are you able to grow revenue without adding additional fixed or variable costs, such as labor? A growing company is typically more valuable than one in decline.
Pipeline of new clients: Do you have a robust pipeline of new clients? At what stage of the sales process are they in? Fully onboarded clients will provide the greatest value because there are contracts and confirmed pricing to project revenue. Clients still in the proposal stage may indicate potential growth, but this stage is still entirely speculative.
Potential growth of existing clients: Does your company offer ancillary or complementary services that are attractive to existing clients? What are the opportunities to grow revenue from the current client base, and what steps are being taken to market services to those clients? Because retention is always less expensive than acquisition, a value premium may be placed where there are opportunities to expand services to current clients.
Billing agreements and contracts: Are your agreements and contracts clearly defined, supported legally, and signed by each client? Is it challenging for a client to cancel an agreement with or without cause? Can revenue from each contract be easily predicted, or are there delays, such as fee waivers, built into the agreements? Existing contracts and agreements contribute heartily to the financial stability of a business and will be heavily weighted in any valuation process.
Specialties: Does your company provide a specialized service or focus on a particular specialty or niche that is unmatched in the market? How is your service differentiated from competitors? Do you own proprietary software or technology designed to deliver optimal solutions? Offering a unique service with proven performance and/or owning specific technology will likely boost the value of your business.
Customer concentration: Are there several several clients that represent a significant portion of total revenue? Are your clients isolated to a specific region or spread across multiple markets? Do you typically provide services to a certain type of client based on your degree of specialization? A prospective buyer may be seeking to add a geographical area to its footprint or expand by adding a specific service.
Current market value: How are other companies with similar services, size or location being valued in the marketplace? Even if you believe your business is worth a certain amount, basic supply and demand dictates that the market will only allow for what the consumer is willing to pay.
Conducting a thorough analysis of your own company as well as the competitive landscape will help you determine a fair and reasonable price for your business. Engage experts such as business brokers, financial advisors, certified public accountants, and attorneys to help you evaluate the true value of your business in today’s market.