It is no secret that urgent care is one of the fastest growing segments in the medical field. Despite potential issues from regulatory changes and private payors, urgent care is expected to remain a hot area for growth and acquisition activity in the foreseeable future.
Today there are currently about 20,000 physicians practicing urgent care medicine at 9,300 walk-in, stand-alone urgent care centers in the United States, according to the American Academy of Urgent Care Medicine.
The growth in urgent care has fueled a robust acquisition market consisting of a variety of different types of buyers including hospital health systems , national franchise consolidators, private equity groups, payors, physician groups, single physicians, and even individual non-physicians investors. One would correctly surmise from this disparate group of buyers that the urgent care industry is highly fragmented. Only a small percentage of operators own more than ten centers, and with most operators owning only one to three centers.
Over the last few years, most of the mid-size urgent care center chains have been bought up by the big urgent care networks. Buyers looking for acquisitions have to now comb markets and pay a premium for single centers and smaller chains.
As urgent care center operators contemplate selling to take advantage of a robust acquisition market their thoughts turn to practice value.
How much is my practice worth?
As a practice broker and appraiser I’m asked several times a week, “How much are practices selling for?” Most people are looking for an easy formula of A+B=C, or some rule-of-thumb they can use to put a value on their practice. It’s an easy question. Unfortunately it’s not an easy answer.
Acquisition prices in recent years often ranged from 3X-5X for operators with one to three centers, to as much as 12X-15X of EBIDTA for large operators with 10+ centers spread across a region or the nation. And then, there are occasional cases of sales prices falling outside this range on the low end.
It’s easy for both buyers and sellers to get confused. One industry article says practices sell for this amount. Another article says practices sell for another amount. A colleague claims they just sold for yet another amount. So why do some practices fall on the low end of the value range and why do some practices fall on the upper end of the range?
This article is meant to give readers a basic understanding of how value is determined and some factors that influence value.
Practice valuation basics
One of the more confusing aspects for those using different sources or articles on practice valuation is not understanding different sources are not always apples-to-apples comparisons when talking about value. This is why one article will say practices sell for X amount, and another will sell for Y amount, and a colleague who just divorced sold their practice for Z amount.
“In order to ensure you are making an apples-to-apples comparison one needs to consider a few key factors.”
Purpose of valuation
Practices are valued for a variety of reasons
Partner buy-in or buy-out
Merger with another practice
Eminent domain actions
The purpose of the valuation will often change several crucial factors that influence value. The purpose of the valuation can change factors such as what is included or excluded from value. If litigation is involved such as in a divorce action, IRS valuation, bankruptcy, or shareholder dispute there can be statutory and regulatory factors that (seemingly arbitrarily) can restrict elements of value. A partner buy-in or buy-out may have to consider factors such as who has shareholder voting rights, or control over the company, or who gets to set minority shareholder compensation. A merger with a competitor or acquisition by a healthcare system may take into account synergies or competitive factors irrelevant to a single standalone center.
What is being valued?
Another consideration is actually what is being valued. For example, some valuations are valuing equity or stock. Other times, only the assets are value and not the stock. One might wonder, “why would this make a difference?” The answer is in a stock sale a buyer would inherit all liabilities of the business. If an old former employee decides to sue the company for wrongful discharge, or injury, or sexual harassment then the buyer would inherit that liability because in a stock purchase it is the same company under the law. Another difference between a stock sale and an asset sale is that in a stock sale the buyer inherits the depreciated value of furniture and equipment. Whereas in an asset sale the buyer can depreciate furniture and equipment all over again realizing significant tax advantages.
Another consideration is the aspect of control interest over a non-control interest in the business. If one is valuing 100% interest in the business several benefits accrue to having unilateral control. The owner can make any business decision without having to consult any other partners or shareholders. Whereas, if one is valuing a 10% ownership stake it is likely the owner of the minority interest will have to accept the decisions of the majority shareholder or abide by the vote of a committee of minority shareholders.
Another consideration is special inclusions or exclusions from the valuation. For example, in some sales transactions the accounts receivables may be included. Whereas, in other sales transactions the seller might retain the accounts receivables. Perhaps, real estate is owned by the business directly and included in the value. Or perhaps, the real estate is owned by the seller through another corporation or LLC and is valued separately from the practice. Some practices may have assets owned by the business, but are not integral to the business operation. Examples I have encountered over the years include items such as autos, boats, airplanes, condos in Hawaii, race horses, and artwork.
Who is the buyer?
Every valuation must apply something called a “standard of value”. Some standard of value terms you may have heard of include:
Fair market value (i.e., hypothetical arm’s length sale situation)
Fair value (i.e., litigation situation)
Investment value (i.e., value to a specific owner)
The type of value being sought drives both the theoretical and practice aspects of the valuation. Each standard of value includes a bundle of requirements and assumptions. In some cases these bundles vary drastically.
Rather than use this forum to explain the nuances of different standard of values, the main take away for the reader is to understand that the standard of value can greatly affect the final “number”. The applicable Standard of Value usually reflects who is the ‘buyer’ (e.g., hospital, another physician owner practitioner, a national franchise, a divorced spouse, the IRS, etc.).
Premise of value
The premise of value is the set of assumptions for the likely set of transaction circumstances. Types of Premise of Value include going concern (i.e., keeping the business operating as is) assemblage of assets (i.e., business is closed but everything is in place) orderly liquidation (i.e., selling off assets over time) forced liquidation (i.e., selling off assets in a hurry, a fire sale.)
Value will be drastically different depending on the Premise of Value used. To help understand how Premise of Value can affect value, consider the analogy of selling a used car. The price one would get selling to a dealer as a trade-in will be different than the price realized selling to an individual through a classified ad. The price realized selling in a leisurely time frame will be different than the price realized if you have to sell the car by 5:00 p.m. tonight.
Approaches to value
When appraisers get down to the nuts and bolts of calculating practice value they usually try to apply multiple ways of calculating value. The idea is to try to consider value from different viewpoints; to look at the coin from both sides.
A thorough valuation will normally use a method from each of the generalized valuation approaches:
Asset or Cost
To complicate things even further, there are multiple methods an appraiser can select from each approach. Some of the more common methods include:
(Income) Discounted Cash Flow, Capitalized Cash Flow, Excess Earnings
(Market) Direct Market Data Method; price/gross, price/net, Guideline Publicly Traded, Prior Transaction, Rule of Thumb
(Asset) Adjusted Book Value, Liquidation, Cost to Create
There are other methods. It is up to the appraiser to use judgement and experience to determine which methods to apply.
Each method has strengths and weaknesses. Some methods are better suited to different situations. For example, methods well suited for valuation of large publically traded companies are of little use valuing a small closely held business such as a medical practice. Some methods are well suited to valuing businesses with a stable income stream. Other methods are well suited to valuing businesses that are growing rapidly or have seen a decline or fluctuation in revenue.
The problem lies in that the application of different methods usually render different value conclusions. The various methods are very sensitive to the metric used (i.e., pre-tax or post-tax numbers, EBIT, EBITDA, net free cash flow, etc.). To arrive at a final value, the appraiser must reconcile the different value results from intermediate application of various methods.
Elements of Value
Value is ultimately a combination of different practice elements. In a sale situation there are five categories of elements:
Terms of sale
Practice characteristics include a variety of factors both qualitative and quantitative. Examples of factors that influence value include:
Revenue growth history/trend
Total gross revenue
Net income/profit margin
Number of providers
Amount and type of equipment and furniture
Range of services provided
Urban vs. suburban vs. rural location
Terms of sale can change value as well. Is buyer getting commercial funding? What is the interest rate? How much down payment is required? Is it a stock sale or asset sale? Is the selling doctor staying on as an employee post transition? Is it an all cash deal or is part of the purchase price in stock or stock options?
Market conditions vary year to year. Is it a seller’s market or a buyer’s market? Is commercial funding available? Is a new competitor planning to open across the street from your practice?
Tangible assets include things such as furniture and equipment, cash, supplies, leasehold improvements, real property, accounts receivable. In general the more valuable these items the greater the practice value.
Intangible assets include things such as trade name, websites, established policies and procedures, going concern value, trained and assembled workforce. Another intangible asset is called goodwill. Goodwill value can be a major component of practice value. Goodwill can be split into two types: personal goodwill and enterprise goodwill. Personal goodwill is usually considered non-transferable and has no economic value. Enterprise goodwill can be thought of the propensity of patients to return to the practice irrespective of a particular individual. Calculating value of the different types of goodwill can be vitally important in divorce cases.
Maximizing practice value
Practices that have more to offer tend to have higher values. Above average practices tend to have greater value and sell for more money. Underperforming practices tend to have a lower value. Purchase industry annual surveys and benchmark reports from industry associations and compare your practice against the industry. Practice owners should make a periodic practice of benchmarking their practice against industry benchmarks:
Revenue per facility square footage
Revenue per provider
Patient visits per day
Net revenue per patient visit
Physician compensation as % of net revenue
Profit as a % of revenue
Total net profit/EBITDA
Support staff ratio
So what things can a practice owner do to maximize value?
Cash is king
Often the single largest factor driving value is cash flow available to the buyer after operating expenses and acquisition debt service. Buyers buy a business for its profit making capability. Therefore, practice owners should attempt to improve practice financials. Profit is key. A small increase in gross income can often have a bigger increase in profit; which in turn can have even a bigger increase in practice value and sales price.
To increase practice revenue owners should consider
Increasing office hours
Having sufficient support staff to maximize provider production
Invest in website marketing
Trim unnecessary expenses
Add number and type of services
Increasing value by adding ancillary services
Too many practices do not take advantage of adding ancillary services to their service mix. There are a variety of non-acute procedures and services that can greatly increase practice revenue and hence value. Ongoing primary care services are a growing trend, especially in light of the widening shortage of primary care physicians.
We have started to see a shift of interested buyers in rural locations for this reason. Most urgent care centers have focused on urban and suburban locations. More and more investors are starting to recognize the potential of urgent care in rural areas. Centers in rural areas often are more primary care-focused with extended hours and the convenience of walk-in capability for patients.
The Urgent Care Association of America’s 2015 Benchmarking Survey reports that only 13% of centers provide ongoing primary care. This percentage is likely to grow significantly as urgent care centers become the future medical home of patients requiring primary care services. Primary care is natural fit as a 2012 report from the Urgent Care Association of America indicates that nearly half the physicians staffing urgent care centers are family medicine specialists.
Ancillary services are a good way to address increased competition as more and more urgent care facilities opening up all over the country. In order to stay ahead and increase profits per patient, more and more facilities are implanting ancillary services into their facilities. A wider array of services offered not only helps your facility stand out from the competition, but it also helps your bottom line.
Examples of ancillary services that urgent care centers and walk-in clinics can add to improve revenue and practice value include:
Occupational medicine services such as drug testing, employment or FAA flight physicals, and worker’s comp work.
Durable medical equipment (DME) braces, TENS units,
Walk-in lab tests such as rapid HIV or step, STD testing, pregnancy test, diabetes screening
Ongoing primary care on a walk-in or appointment basis.
VAT/ENG equipment and therapy
Some of these ancillary services can be surprisingly profitable and easy to implement with minimal investment and disruption to the practice. According to Matt Brown, CEO of Medpro Business Advisors, a company specializing in advising and implementing ancillary services into practices, “the top two services we recommend for an Urgent Care facility that wants to increase patient flow, and their profitability are allergy testing and VAT/ENG testing. These services are easily implemented into any Urgent Care facility.” Adding these services can be a quick way boost profit margins and in turn increase practice value. According to Mr. Brown the addition of allergy testing can be implemented in as little as two weeks with no upfront costs using turnkey implement services. An additional benefit is that there is no increased burden on the physician or mid-level providers’ time.
Small 1-3 center urgent care chains tend to sell for lower multiples than larger chains with more locations. Larger facilities with more providers and greater numbers of patient visits tend to have greater value.
New is better
Practices that keep up with trends in technology and protocols tend to have higher practice value. The same goes for non-technical equipment and furniture. Not only do newer assets have greater value in and of themselves, but the overall appearance and curb appeal makes a practice more attractive to patients as well as prospective buyers.
Practice valuation is an easy concept. However, its application is complex and has numerous factors that must be considered. Unfortunately there is no easy way to accurately value a practice using a simple formula or rule-of-thumb. However, industry journals and resources available on the internet can provide a lot of useful information for those looking to understand practice value. When comparing value guidelines one needs to understand some of the factors and methods used in order to have an apples-to-apples comparison before trying to apply it to a particular practice.
The good news is that practice owners can use industry benchmark data and key practice indicators to measure their practice against the industry. This makes it relatively easy to identify areas where the practice is underperforming and make adjustments. Keeping your practice performance in line with industry metrics is a good way to improve practice value. Another way to improve practice value is to increase revenue by adding hours, providers, or services.
This is an exciting time for the urgent care industry with many opportunities available to those willing to seize them. ■