Health businesses of all types - medical practices, specialist providers and aged care - have always been attractive to the owner-operator, and partnerships looking for scale and investors. As business advisors working with and supporting business owners, we see a broad spectrum of industry participants seeking to support a community, earn a living, grow their investment and create value. Across this spectrum of participants, the business outcomes if measured as value created, can vary significantly. Health sector businesses can be valued within a wide range of multiples, as low as two and up to 15 times future maintainable earnings.
Unsurprisingly, the greater the robustness of the underlying business, the greater the opportunity to maximise the multiple. While focusing on maximising an earnings multiple may suggest it is all about the exit event, this is not the case. Many of the factors that contribute to a higher earnings multiple will also have significant benefit to business owners' every day of trading. Focusing on these strategic issues provides business owners greater certainty of income and minimal disruption or risk due to fluctuations of earnings.
Working with our health sector clients to support them to develop, mature and grow their businesses, the common indicators of a robust business that ultimately translates to creation of strategic value include:
- Increased geographic coverage of the business. Increasing the reach of a business or the catchment from which it draws patients through establishment of numerous sites, facilitates increases in value, decreasing the risk of being reliant on particular sites or locations and provides numerous opportunities for increasing clients and referrers across numerous markets. Obviously each site has to contribute positively to the overall business within this proposition - growth for growth’s sake is not enviable.
- Establish sites in growth corridors. A business rarely wants to be the first entrant to a market and suffer start-up losses as the surrounding area matures and obtains critical mass (from a client base perspective), but there is significant merit in being one of the early movers into each growth corridor to access prime sites, establish relationships that can be enduring as markets mature, and grow with the local economy so that the practice continues to create value through the natural evolution of their local area, rather than competing against established players in an existing mature and capped market.
- Achieve economies of scale and support growth with investment in efficiencies. Whether efficiencies are gained through back of house, adoption of technologies, or leveraging purchasing power, all opportunities must continually be explored.
- Develop a robust business of engaged practitioners. A business is only the sum of its people and ensuring the principals are engaged, commercial and driven, is key. The culture of any business is critical to long term success. Alignment can be sought and confirmed through the documentation of working governance and ownership relations, whether it is a partnership or shareholders’ agreement, stating clearly the operating rules, goals and strategies to be honoured.
- Engage all practitioners and staff. People are the business, representing the business in every patient interaction, and driving (or not) operating efficiencies and accordingly the likelihood of sustained success rests in their behaviours. Beyond culture, consider alignment with owners’ goals with concepts such as quasi equity or other rewards for effort (of all sorts).
- Age-group diversity. Having a range of ages across practitioners is always useful and it facilitates transition of goodwill from one practitioner to another, provides a means for exit for the more senior practitioners, and also the drive and energy of younger practitioners can be harnessed. Combining youthful exuberance and years of experience across a partnership group assists with dynamics of chasing growth and ensuring a mature business is developed. It is also a key to effective succession management.
- Beyond all, focus on the patient. Engagement and meeting the needs of a changing client/market are key. As opportunities to provide new service offerings or adopt new technologies for the benefit of patients become available, these should be harnessed in order to remain relevant and provide a point of difference from less driven practitioners.
Focussing on the above key factors will not only assist with the establishment of a more robust and mature business capable of withstanding the economic cycles and disruptions through people changes, but also provide the means to maximising value upon practitioners’ ultimate exit.
Mark Harrison is a Business Assurance and Advisory Partner at Pitcher Partners Melbourne.