What Drives Value

As we enter a new year and companies start to set annual goals and objectives, it is a good time to remember what really drives a company’s value.  Owners frequently focus on revenue growth and sometimes overlook other factors that enhance a company’s value from a buyers’ perspective. Routinely assessing value drivers can allow a company to ensure executives have the appropriate operational objectives in place to maximize long-term value.  Value drivers are different for each segment of healthcare.  While there are more than a dozen value drivers, below are four of the most common in healthcare:

  • Customer/Referral Diversity: Customer/Referral concentration is probably one of the most important value drivers.  If you have one or two sources making up more than 20-30% of your total revenue then your valuation could be severally discounted.  If the concentration gets above 50% there may not be a market at all for your company.
  • Owner Involvement: The more the business depends on the owner, the more likely the value will be lowered.  Especially, if the owner is the key business developer or salesperson.  One of the things we see most often is the owner believing they are not as key to the business as they are.  It’s important to take an honest evaluation of your role in the business.  If you acting in a role other than a chief strategy officer, then you might want to set some objectives to replace yourself over time.
  • True Differentiator/Proprietary Technology: For healthcare services companies, it is difficult to differentiate. Those who develop defensible strategies that lead to increased referrals, higher profitability and growth rates, generally receive premium valuations. Interestingly, strategic buyers rarely maintain the acquired differentiators (they typically have their own), although they are paying a premium for the asset.  Certainly, if you are in healthcare IT and if you have proprietary technology, this will be a value driver.
  • Loyal Employees/Low Turnover: Competing in healthcare is as much about competing for staff as it is about competing for patients or referrals.  Low profitability is sometimes symptomatic of many things, but a healthcare services acquirer will often look to find the root cause in staffing turnover rates, which leads them to company culture or quality of care.  High turnover rates are often accepted as the “part of the industry”, but those companies that achieve market premiums find a way to recruit and retain.

Executives often lose sight of what drives value.  Certainly, revenue and cash flow are key metrics; however, over the years Wyatt Matas has found successful mostly focus on non-financial value drivers. The financial value drivers ended up taking care of themselves.  By identifying value drivers that are important your industry, developing objectives for incremental improvement and monitoring consistently, you will maximize your value upon exit.

Bonus:  Here are several other value drivers: financial history, quality of care, reputation of the business, recurring revenue, cash flow and profitability, depth of management, company culture.


About Wyatt Matas:  Wyatt Matas is a healthcare investment banking firm focused on assisting clients in acquiring and selling healthcare businesses.  For more information or to subscribe to our articles and white papers, enter your name and email below.