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Capital deployment: the 6 main pillars that drive valuation in health care

By Andrew Colbert
From the December 2016 issue of DOTmed HealthCare Business News magazine

Wouldn’t we all love to sell our company for 20x revenue?
There is nothing more fun than talking about that huge exit multiple that XYZ company just paid. However, too often today, health care industry chatter is focused on the multiple itself and not the unique attributes of the target and the buyer’s specific situation. These impressive outcomes often distract attention from the fundamental attributes that truly create value. A company is worth the cash flow it generates. Long-term business value is created not by building a nice storefront window, but by building a set of unique products and services that are in high demand and capable of delivering both growth and profit.

It is important not to construct a business with the exit in mind, but to build a solid company with strong fundamentals. There will never be a shortage of buyers for good companies, especially in the health care space, which is made up of so many subsectors such as physician practices, hospitals and health systems, payers, information technology, analytics, diagnostic therapeutic and biomedical companies, and so forth. The list is massive and represents nearly 20 percent of our GDP.

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Focus from the get-go on the foundational components is critical to building a strong company that will be in high demand. There are six core pillars that are critical to driving enterprise value: strategic organization; technology platform; industry dynamics; “best of breed” perception; financial performance; and management team.

Pillar one: Strategic organization
The foremost pillar is strategic organization and professionalizing. We believe that at least 20 percent of a company’s value is tied specifically to the external appearance. Regardless of what’s inside, it’s a lot harder to sell your house when the outside paint is peeling and the front lawn is covered with weeds. Generically we might just call this good housekeeping. This can cover a wide range of intangibles that are essential to smooth operations and future transaction success.

For instance, proper HR policy documentation, secure confidentiality protection regarding source code and other intellectual property, accurate and complete contract databases that indicate when renewals are coming up and a host of other similar data and documentation. A company needs to be able to provide appropriate information and proper documentation at the press of a button.

For example, one area often overlooked is strategic tax management. Many companies underestimate state tax compliance, which can become problematic. Categorization of employees is another complex area. Younger companies sometimes see an advantage in 1099 status, but this can become problematic if the IRS believes the individuals should be W-2 employees. If such elements are not in place, a company can look unsophisticated when a larger corporation or investor assesses its policies and procedures. These are all things that a company can address proactively from its inception, and thereby greatly enhance its valuation from startup to exit.
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