Wyatt Matas and Dealzumo recently completed the initial phase of a study of 68 healthcare service companies to determine when in their life cycles these companies reached peak value. The results are quite interesting. The median peak valuation for these companies occurred 6.4 years from the date of their establishment. We will be publishing an extensive paper of all our findings in the near future, but this article will discuss a couple of the key points from this phase of the study and how healthcare executives can leverage the information.
Wyatt Matas collected data from healthcare companies from previous investment banking engagements. Wyatt Matas notified former clients of the general intent of the study and received permission to use their data using de-aggregated information methods. As a healthcare investment banking firm, Wyatt Matas provides buy-side and sell-side merger acquisition advice, and capital raising and valuation services to healthcare services and healthcare IT companies. This gives us intimate access to a companies’ financial statements and operational and strategic decision making processes. As we compiled and analyzed the data, we regularly interviewed executives to question them on anomalies, strategies, philosophies and tactics. Of the companies we analyzed, 42 began their businesses as start-ups and 26 from acquisitions. The median life span of the companies, defined as the time between inception and when the companies were sold or liquidated, was 14.6 years. The median size company at its peak revenue was $23.9 million.
Valuation Cycle of a Healthcare Service Company
Note: Valuation decline, for the median companies, leveled after 10.2 years.
As we analyzed the data, we wanted to find out what factors contributed to sustained value creation. Below are our initial findings based on interviews with companies that broke the curve and continued to create value after 6.4 years in the business: (Most of the business pursued multiple growth strategies.)
- They had a significant change in strategy: 36% of the curve breakers indicated they entered new markets or business lines.
- They made acquisitions: 42% made add-on acquisitions. Typically, to enter into new geographical locations.
- They brought in new capital: 22% of curve breakers brought in new investors to accelerate growth. Usually to make acquisitions.
- They brought in new leadership: 13% added to or changed senior leadership. This change often occurred at the CEO level or included adding several senior-level executives.
We also attempted to find out why the median companies’ valuation was peaking at around year 6. This was not an easy question to answer. It was not feasible to conduct a deep analysis on each company to determine why their value stalled. On a select number of companies (12) that fell in the median range, we took a substantive look at their businesses and conducted in-depth interviews with their executive(s). While we have an opinion of why these companies failed to continue to create value, it is difficult determine if we could apply the same reasons across the majority that fell into the median. That said, we have made a few assumptions about why some companies fail to create value beyond 6 years:
- It is hard to sustain energy: The first few years of a business (whether it is a start-up or acquisition) is difficult work. It is difficult to sustain that level of energy and enthusiasm for the business.
- Scalability problems: In many cases, companies continued to grow revenue long after year six; however, EBITDA margins did not keep pace. Each sub-segment of healthcare services has its own challenges, but understanding how to scale a business is a skillset that some owners do not have. In some cases, more value would have been created if they would have leveled off growth and focused on profitability.
- Limited access to capital: As with many small businesses, limited access to capital can stunt growth and value creation. Most healthcare service businesses do not have assets to lend against so they are limited to account receivable lending, which is rarely viewed as true growth capital.
- Market Limitations: Most healthcare service sub-segments are competitive in terms of referral sources, patients and clinical staff. In many cases, it is also difficult to differentiate. Unless a company can find a differentiated strategy and/or accept markets limitations, they are typically destined to a limited market cycle.
- Boredom: A recurring theme, especially for true entrepreneurs is boredom. Once they have the business started and the initial growth has been realized, running the day to day business is boring to a number of business owners.
As we finish the research and analysis, we will be publishing an extensive white paper. You can find our other white papers and articles at www.wyattmatas.com. If you are not on our research distribution list, feel free to email me at firstname.lastname@example.org.
Bonus: Based on a smaller but growing sample size, healthcare IT companies have a valuation cycle that is 4.5 years. Healthcare IT companies are generally built to sell and have a much shorter life span, 7.8 years.
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