Driving premium platform valuations for future growth

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Driving premium platform valuations for future growth

November 16, 2018
Business Affairs
From the November 2018 issue of HealthCare Business News magazine

By Andrew Colbert

The radiology M&A market is hot. Following the trends of M&A activity in other medical specialty markets, radiology practices are experiencing consolidation like never before.
This high level of M&A activity does not seem to be slowing down. With the trend of physician groups evaluating acquisitions and partnerships, it is important for physician practices to understand what drives their underlying valuation. Not only will this help the practice understand their relative worth, it can also position the practice for a better valuation in the future by knowing where to invest. To do this, it requires taking a step back and looking at the practice with an objective lens.

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One of the most important differentiators in valuations in the physician sector is whether or not the group is considered a true “platform.” Not all practices are platforms. A platform is a scalable business that has invested deeply in administrative and clinical capabilities, and has growth opportunities through acquisitions and market expansions. These practices are built for scale and command strong growth potential that investors, buyers and partners find desirable. In order to command a premium valuation, it is vital that physician groups evolve into a distinguishable platform in their core markets.

The first step in creating a platform is to understand the value buckets that potential investors, buyers and partners are looking for. Value drivers include:

Market Opportunity: Key to value maximization is being able to affirm how a company is poised for success relative to its own potential competitors in the market. What are the opportunities for organic and M&A growth in the market? What are the dynamics with the local hospitals and health plans in the market?
“Industry Leader” Perception: “Best of Breed” perception conveys how you stand out relative to other competitors. Is the company perceived as a leader in the market? The company’s reputation in its current market and region matter to investors, buyers and partners as this reputation can lead to future growth opportunities for the practice. From quality of hospital and client relationships, clinical capabilities and quality measurements to its technology investments in data analytics and workflow, the practice needs to be a true, recognized platform.
Financial Performance: Fundamentally, a company is worth the cash flow that it generates, not in the past, but what is expected in the future. The greater the visibility a company has into future growth the higher the value that outside investors/buyers will ascribe. The financials should also showcase revenue diversification so investors and buyers can see how the physician group can withstand any potential loss of customers or service sites.

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