This year, one of the real focus areas for M&A activity will be specialty services, including dermatology, ophthalmology, fertility, orthopedics, and gastroenterology. ASCs and multispecialty medical groups are also on the radar screen. Niche areas within healthcare are still highly fragmented and underpenetrated. Today, many operators own fewer than five locations and lack a dominant market position. This dynamic presents numerous opportunities for consolidation as well as organic growth.
Rising valuations in the healthcare space are now catching the attention of small practices. Many founding physicians in these specialty areas have built their practices to a reasonable size and are reaching a point in their careers where they want to exit. They are quickly realizing they can sell for a premium in the current market and, thus, may be receptive to potential acquirers.
Just recently, for instance, Orthopedic Associates, which has 12 providers and multiple locations across the greater Oklahoma City area, joined Mercy Clinic. In a second example, CEI Vision Partners, a portfolio company of private equity firm Revelstoke Capital Partners LLC, acquired Virginia Eye Consultants, an ophthalmology group comprised of 17 providers that service the Norfolk, Virginia Beach, and Chesapeake markets.
These are just a few of the many midmarket deals we can expect to see this year in specialty healthcare services. Given the availability of capital and the financially attractive characteristics of this market, expect to see a further increase in acquisition activity by both strategic and financial buyers.
Due diligence plays an important role to ensure investors get what they bargain for. Here are a few important variables to take into consideration:
If a clinic’s billing practices are not in compliance with applicable laws and regulations, it can have a significant impact on the valuation of the business. An example might be a situation where a clinic is charging higher amounts for procedures than allowed. In addition to regulatory risk for the buyer, this practice could result in over-stated revenues and an artificially inflated valuation.
There are many small, owner-run practices in which the founding physicians draw exceedingly large salaries that are not consistent with market rates. So, it is incumbent on either a financial or strategic sponsor to draw up a more reasonable and formalized compensation package.
Cash to accrual considerations
Our experience with most practices is that internal financial statements are prepared on a cash basis of accounting. Therefore, it is critical to understand the cash to accrual adjustments; specifically, on the revenue side. In a growing practice, this can significantly impact earnings.
Sellers, for their part, need to conduct their own internal diligence to make themselves more attractive to buyers. It’s not uncommon for specialty practices to lack sophistication in terms of accounting and financial reporting. In general, these groups should convert to generally accepted accounting principles (GAAP) which will give their numbers more credibility among potential investors—and can ultimately lead to higher valuations.
The prognosis for M&A activity in specialty practices looks promising this year. But both buyers and sellers should properly prepare so they can be equally well-positioned to seize opportunities that can generate healthy returns.
InsightHealthcare sector helps ignite today’s red-hot M&A marketClaudine CohenClaudine Cohen shares insights from a roundtable on trends in healthcare M&A; COVID-19 and other current factors to include in transaction diligence; and more.
InsightCalculating quality of revenue is critical in healthcare dealsClaudine M. Cohen, Anna Kostanian, Kemi Sulaimon, Caroline ZnaniecQuality of revenue can be a key factor in a target company’s valuation, but it can also be extremely difficult to calculate accurately. Learn more.
InsightHow hospitals and health systems can use price transparency to become more patient centricThe new price transparency rule, which took effect January 1, 2021, presents hospitals and health systems with opportunities to drive greater patient centricity, improve patient outcomes and deliver a value proposition that justifies premium charges and builds public trust. The objective of price transparency is to become more patient-centric, and the final rule is just one step to getting there.
InsightHealthcare industry prognosis: The outlook for investors and M&A activityRead perspectives on technology, government factors, M&A, and other healthcare industry trends to watch and plan for in 2021, from CohnReznick’s Claudine Cohen.
InsightFor FQHCs: Top considerations for recipients of Provider Relief Funds and other COVID-19 fundingSteven SchwartzRead what to know about using and reporting Provider Relief Funds and HRSA and FCC COVID-19 funding, Single Audit implications, and more.