Owners of home medical equipment (HME) companies rarely seek to understand the value of their company until they urgently need it—usually when problems arise such as settling a shareholder or partner dispute, undergoing a divorce, or obtaining a bank loan. That means that owners miss the opportunity to better understand the value of their company, how to strategically increase value over time, and how to integrate company value with their personal financial planning. Given how volatile and complex the market is, with evolving federal and state laws and regulations and business transactions, missing these opportunities can mean leaving money on the table during a sale or company merger.
Here are six reasons why getting a valuation of your company might be the most important thing you do this year.
1. You’ll learn what your company is—and could be—worth.
Many owners wait until a life-changing event before valuing their HME company—and then it’s too late to make changes that increase value. For example, Vertess recently performed a valuation of a behavioral health care company for a majority owner in his mid-60s who wanted to sell and retire. He was surprised to learn that his company was worth about half of what he had hoped. Had he done the valuation three to five years earlier, he could have taken steps to increase the company’s value before selling.
2. It puts all owners on the same page.
It is likely that each partial owner of a company has a different expectation of company value. Having diverse expectations of company value that aren’t openly discussed and considered can lead owners to make poor financial decisions. For example, an HME with several owners had one who planned to exit the company in a couple of years. He assumed the other owners would buy out his ownership interest for a price he had come up with on his own. The owners were surprised by the results of an independent valuation—especially the retiring partner, whose self-determined price significantly exceeded market value. He decided that he would have to delay his retirement and stay for a few years to increase the company’s value.
3. You’ll understand what drives value.
Most HME owners focus on top-line and bottom-line outcomes as key value drivers. While revenue and profit growth favorably impact value, there are many other drivers. For example, a valuation of a dental practice revealed a number of issues: a landlord who was unwilling to renew the lease on a long-term basis, an owner who made all business decisions alone, a lack of employee autonomy, outdated technology, and one source (contracted dental plans) accounting for a significant amount of revenues. Needless to say, the dentist was not pleased by the results—but he did learn how he could improve the value of his practice. The earlier valuation occurs, the more opportunity there is to enhance value over time.
4. You’ll know who the buyers are.
Few HME and homecare company owners have a good understanding of the pool of potential buyers of their companies. Most are surprised by the number and variety of potential buyers. It’s not the number of buyers that matters, it’s the quality of those potential buyers that makes all the difference. Narrowing down a pool of quality buyers that best represent the seller’s specific desires and exit strategy creates real value. Knowing the type of buyer pool helps providers manage companies in a way that maximizes the purchase price.
5. It provides a road map for success.
Before selling a home, you research the value of comparable homes in the market. Unlike with a home, you can greatly influence the value of your business by planning for an exit. Unfortunately, most owners don’t know where to begin—they just know where they would like to end up. Owners typically have a price for their business in mind based on what they feel they need for retirement, savings or another objective. But if your goal is to get $10 million for your business in two years, you need to know exactly the value of your business now. If your current value is $8 million, you can plan to increase your growth by 12% annually to achieve your target. If your present valuation is $5 million, you likely need to adjust your expectations or your timeline or both. The point is: if you don’t plot a course, don’t be surprised where you end up.
6. Your options become clear.
Many HME owners report being approached by potential buyers out of the blue, including reputable investors. Knowing the value of your HME company and having an idea of the future potential value puts you in a stronger negotiating position. For example, soon after completing a valuation of their OB-GYN practice, a set of clients was approached by a local hospital about selling the practice. The owners were well-prepared to evaluate and negotiate the hospital’s offer.
Obtaining a market-based valuation of your HME company is a cost-effective way to understand key value drivers that allow you to plan for the future in today’s dynamic health care marketplace. Not only will you know about your HME company’s value, but you will also have a keener sense of what you need to do to build value over time for you and your family.