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Introduction to Valuation in a
Healthcare Setting
Healthcare HelpingsMay 1, 2019
Joshua Hedrick, MBA, CVA
Prepared By Kraft Analytics, LLC Proprietary and Confidential
Speaker Introduction
2Prepared By Kraft Analytics, LLC Proprietary and Confidential
Joshua HedrickMBA, CVA
Senior Manager
Kraft Analytics, LLC
3
Transaction Advisory
LOI Closing
PreliminaryValuation andDeal Pricing
RevisedValuation andDeal Pricing
Final Valuation, Deal Pricing andAdjustments
• Closing Balance Sheet• Working Capital and other Purchase
Price Adjustments• Purchase Price Allocation• Impairment Testing
Due Diligence & Legal
Deal Negotiation & Financing
Target Identification Transaction Accounting
Litigation
Prepared by Kraft Analytics, LLCProprietary and Confidential
Personal Goodwill
Succession Planning
Overview
I. Introduction to Value
II. Value Drivers
III. Measuring Value
4Prepared By Kraft Analytics, LLC Proprietary and Confidential
Valuation is an art and a science.
Prepared By Kraft Analytics, LLC Proprietary and Confidential
Introduction to Value
“Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks.- Warren Buffet, 2008 Chairman’s Letter
6Prepared by Kraft Analytics, LLCProprietary and Confidential
7
“Is it a 21 jewel movement or a 23 jewel movement?”
“Who carries a pocket watch?”
“Maybe it would make a nice gift for my dad.”
“It reminds me of my great uncle.”
Prepared by Kraft Analytics, LLCProprietary and Confidential
Standards and Premises of Value
8Prepared By Kraft Analytics, LLC Proprietary and Confidential
Investmentor Synergistic
Value
FairValue
FairMarket
Value
PREMISE OF VALUE
In-ExchangeForced
Liquidation
In-ExchangeOrderly
Liquidation
Assemblageof AssetsIn Place
Assemblageof Assets in
Continued Use
Standards and Premises of Value
9Prepared By Kraft Analytics, LLC Proprietary and Confidential
Investmentor Synergistic
Value
FairValue
FairMarket
Value
PREMISE OF VALUE
In-ExchangeForced
Liquidation
In-ExchangeOrderly
Liquidation
Assemblageof AssetsIn Place
Assemblageof Assets in
Continued Use
Seller WantTo Get
Buyers WantTo Pay
Synergistic Value
10
Revenue Synergies
• Cross-selling• Footprint• Access to IP
Cost Synergies
• Economies of scale• Supply chain efficiencies• Patents
Financial Synergies
• Access to more or cheaper capital
• Tax benefits
Market Synergies
• Increased category power / influence
• Elimination of rival
Fair Market Value
Prepared by Kraft Analytics, LLCProprietary and Confidential
Prepared By Kraft Analytics, LLC Proprietary and Confidential
Value Drivers
12
Value = CFn
(1 + r)n
Time• Cash Flows
• Operational• Terminal
Valuation Drivers
Prepared by Kraft Analytics, LLCProprietary and Confidential
• Growth Factors• Overall Market - Growth / Size• Proprietary Protection for Company• Barriers to Entry for Competitors• Margin Maintenance or Growth Expectations • Opportunities to Realize Economies of Scale• Access to Distribution / Distribution Strategy
• Risk Factors• Relative Certainty of Future Cash Flows• Dependencies – Key Man, Suppliers, Customer• Market Forces - Direct Competition, Substitute Offerings, etc.• Political and Regulatory Factors• Obsolescence• Macroeconomic Forces
Value Drivers
13Prepared By Kraft Analytics, LLC Proprietary and Confidential
One-Time Recurring
Sca
lab
leD
epen
den
t o
n
Per
son
al G
oo
dw
ill
Risk
Gro
wth
Po
ten
tia
l
SAAS
Financial Consulting
Goodwill
14
Enterprise Personal
“A business’s reputation, patronage, and other intangible assets that are considered when appraising the business, esp. for purchase; the ability to earn income in excess of the income that would be expected from the business viewed as a mere collection of assets.”
- Black’s Law Dictionary
“that intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified.”
- The International Glossary of Business Valuation Prepared By KraftCPAs PLLCProprietary and Confidential
Value Drivers
15Prepared By Kraft Analytics, LLC Proprietary and Confidential
Spa Services (e.g. Botox)
Aesthetician / Laser Treatments
Plastic Surgery
Sca
lab
leD
epen
den
t o
n
Per
son
al G
oo
dw
ill
Gro
wth
Po
ten
tia
l
One-Time RecurringRisk
Elective
Covered
Enterprise (vs. Personal) Goodwill
16Prepared By Kraft Analytics, LLC Proprietary and Confidential
• Quality/Consistency• Brand Recognition
Necessary
• Focus on the common direction• Infrastructure to support mission
How to Achieve
• Mayo Clinic• Women’s Care Florida
Examples
• Scalable with less risk AND growth potential• Transferability of earnings
Impact on Earnings Quality
Leveraging Healthcare Extenders
17Prepared By Kraft Analytics, LLC Proprietary and Confidential
• Oversight by physicians• Procedures aligned with skill level of provider
Necessary
• Have proper processes in place• Think of practice as a business, not a job
How to Achieve
• Dental• Urgent Care
Examples
• Scalable AND growth potential• Higher earnings as a % of collections
Impact on Earnings Quality
Prepared By Kraft Analytics, LLC Proprietary and Confidential
Measuring Value
Valuation Approaches
Asset Approach What are the individual pieces
worth?
Market Approach What have other buyers paid for
similar investments?
Income Approach What cash flows will be
generated in the future and what
are they worth today?
19Prepared by Kraft Analytics, LLCProprietary and Confidential
Asset Approach
• Adjusted net asset value• Typically start with value on books
• Assets/liabilities adjusted to market value
20
Net Asset Value
Income Approach 101
21
Current Value Interim Cash Flows (or Losses)
Exit Event
Future cash flows are discounted back to a current value using a discount rate, commonly referred to as the cost of capital (equity or weighted average).
Prepared by Kraft Analytics, LLCProprietary and Confidential
Income-Based Methodologies
22
Discounted Cash Flows (DCF) Analysis
Capitalization of Cash Flows
0 1 32 4 Terminal or Exit
4
Cas
h F
low
s ($
)
0 1 or Base
∞
Cas
h F
low
s ($
)DCF analysis may consider:• Capital structure shifts• One-time capital expenditures• Periods of elevated growth or
declines• Changes in profit margin
Assumes that the cash flow base grows (or declines) by a steady rate into perpetuity.
Prepared by Kraft Analytics, LLCProprietary and Confidential
Common Multiples
23
• Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)• Proforma, Adjusted Trailing-Twelve Months
• Historical Trailing-Twelve Months
• Forward Twelve Months
• Revenue
• Sellers Discretionary Earnings (SDE)• EBITDA + Compensation for 1 owner (other owner
compensation adjusted to market)
• Industry Specific (e.g. $ per Bed for Nursing Home or $ per Barrel for Beer Distributor)
Prepared by Kraft Analytics, LLCProprietary and Confidential
Cap Rates and Multiples
24Prepared By Kraft Analytics, LLC Proprietary and Confidential
𝑉𝑎𝑙𝑢𝑒 =𝐶𝐹(1 + 𝑔𝑠)
(𝑘 − 𝑔𝑙)= 𝐶𝐹(1 + 𝑔𝑠) ×
1
(𝑘 − 𝑔𝑙)
CapitalizationRate
Multiple
𝐶𝐹 = Cash Flow; typically adjusted orproforma
𝑔𝑠 = Short-Term Growth rate or the growth rate expected in the next period
𝑘 = Discount Rate or Cost of Capital𝑔𝑙 = Long-term Growth Rate or the
sustainable growth rate expectedinto perpetuity
Value is a function of risk and growth.
Multiple Example
25
Trailing-Twelve Month EBITDA $ 1,000,000
+ Discretionary Expenses 25,000 e.g. season tickets, club memberships
+ One-Time Expenses 10,000 e.g. legal expenses related to lawsuits
+ Transaction Costs 5,000 e.g. accounting, legal
+ Owner Compensation 2,000,000 e.g. bonus, salary, perks
- Market Cost to Replace Owner (400,000) based on duties, reflects industry and geography
Adjusted EBITDA 2,640,000
Multiple 3
Operational Enterprise Value 7,920,000 total (equity + debt) value of a business' operations; generally includes fixed assets and intangibles
+/- Included Working Capital 50,000 sellers often retain cash and receivables
- Assumed Debt (250,000) sellers often retain debt
Transaction Price $ 7,720,000 Prepared by Kraft Analytics, LLCProprietary and Confidential
Market Approach
26
•Comparable Transactions•Guideline Public Companies•Rules of Thumb
• What we use:• Pratt Stats• PitchBook• Business Reference Guide• Analyst Reports• Industry Insiders
Prepared by Kraft Analytics, LLCProprietary and Confidential
Questions?
Joshua Hedrick(615) 782-4249
27Prepared By Kraft Analytics, LLC Proprietary and Confidential
Upcoming Healthcare Helpings
• Topic and Date are TBD/Summer 2019 –more info to come…
Please be on the lookout for our follow-up email, click the link and complete the evaluation to receive
your CPE Credit. 28