The behavioral health sector has grown tremendously in recent years, mainly because of the addiction crisis and mental health complications. For businesses to capitalize on this growth, mergers and acquisitions have become a precise modus operandi. However, failures to attain desired goals are rampant, partly due to the inability to perform clear financial valuations. This blog guides the company owners about the importance of healthcare business valuations.
Do you seek assistance in the financial assessment of a behavioral health business? Let Strategique Partners help you with accurate valuation.
1. Why Business Valuation Matters in Behavioral Health M&A?
Behavioral health financial valuation is not merely like putting a purchase price on your business. Rather it helps you realize the main value drivers you can use to attract investors and buyers. By clearly depicting the financial health of your business, it is also very important in helping you identify the following aspects:
- Weakness of the Business
- Strengths
- Potential Growth Areas
- Marketable Aspects of Business
- Regulatory Compliance Costs
This makes it essential for business owners when selling or looking for financing options and for sellers when looking to buy a behavioral health business.
1. Informed Decision-Making
An impartial and accurate healthcare business valuation will help you make informed decisions. As a seller, you will be prevented from pricing your business highly to avoid attracting buyers. As a buyer, it will help you buy a company after a solid financial analysis and knowing its growth potential.
2. Attracting Investors
When you document the growth potential and actual value of your company, it helps investors a great deal to understand the profitability of your company. This way, the accuracy of your valuation will be attractive for investors.
3. Negotiations
One way of becoming confident about the asking price and your terms of purchase is by having a credible and provable valuation of the business from an external source. Once you clearly know the following, you will be free to ask for a reasonable price:
- Value of Assets, both tangible and intangible
- Market Standing
- Revenue Streams
2. Factors Impacting the Valuation of Behavioral Health Businesses
Business valuations in the behavioral health sector are not the same as those done for other businesses because of the unique challenges in the healthcare sector. The following factors decide the value of the business, so it is important to consider them in business valuations:
Revenue Streams and Various Payers
Businesses in the behavioral health sector receive payment for services from various sources. The payer mix is very diverse. Typically, the revenue streams for behavioral health business are the following:
- Private Pay
- Insurance Programs like Medicaid
- Governmental Funding
A behavioral healthcare company’s cash flow stability and future profitability depend on the revenue streams and payer mix. Therefore, your valuations must account for different revenue streams. Valuation experts like Strategique Partners evaluate the payer mix and the reliability of revenue streams for accurate valuation through its financial services and billing experts.
Regulatory Compliance and Licensing
In regularized markets such as those of the healthcare and behavioral healthcare sector, regulatory compliance, licensure, and accreditations are decisive in the value of the business. Noncompliance or any laps in fulfilling the state and federal requirements can cost you the following outcomes, which also impact the value of your business:
- Fines and Liabilities
- License Revocation
- Other Long-Term Penalties
However, if you comply with all legal requirements, have your licenses updated, and get quality accreditations, your behavioral health business can be valued higher. You can get help from our regulatory, licensing, and accreditations support to get better value based on this factor.
ROI and Operational Efficiency
Profit margins, return on investment, and operational efficiency are common to all business valuations. However, the thing that makes these aspects unique in the case of behavioral health businesses is that these aspects largely depend on the service offerings by the facility. For instance, an outpatient program offered by a rehab business will have higher overhead costs than residential treatment services. So, it is wise to consider the following factors in the valuation of profit margins and operations:
- Cost of Care Dispensation
- Technology and Automation of Operations
- Staffing Requirements
You can analyze your operational efficiency and profit margins to include them in your business’s valuation with the help of operational experts.
Market Position and Growth Potential
The growth in the behavioral health sector does not ensure that all businesses are positioned well to expand and grow. A business’s value is always decided based on the existing place of the business in the market and its potential to grow further. It can be a very productive point to market your business as a seller. A business’s position in the market is decided on the basis of these factors:
- Recognition by Clients
- Reputation of Business in the Market
- Growth Opportunities
Expansion through behavioral health branding can help you improve these aspects. Furthermore, it is always highly recommended to seek the help of company development experts.
3. Valuation Methods in Behavioral Health M&A
Quite a few standard valuation methods are being used in the behavioral health sector. Some of them are listed here:
a. Income Approach
The income approach allows you to value a business based on its ability to earn. Through this approach, you can calculate the value by finding the actual value of the cash flows. Commonly used methods of income approach are:
- EBITDA Multiple
- Discounted Cash Flow
b. Market Approach
Another method of calculating the worth of a business is by seeing it in comparison with other businesses. By finding a comparable business and assessing its sales price, the market approach finds a way to give a financial judgment on your business. The following methods spearhead the market approach or comparative approach:
- Comparable Transactions
- Industry Trends
c. Asset-Based Approach
The asset-based approach for financial assessment of a business requires you to value a business based on the fair market value of the assets owned by the company. It is less common among behavioral health businesses as they have fewer tangible assets. However, if a behavioral health business owns valuable assets like real estate or specialized equipment, they do asset-based business valuations.
4. Challenges in Accurate Business Valuations
Accurate valuation is not easy at all. In the case of behavioral health business, the process gets more challenging because of its unique needs. Here is a list of challenges you should be aware of beforehand:
1. Fluctuating Reimbursement Rates
The reimbursement rates in the behavioral health sector are sensitive to changing state policies or fluctuating insurance company practices. The lack of uniformity and reliability in the policies makes it hard to estimate future earnings accurately. However, behavioral health business experts like Strategique Partners can help you in estimating the right projections even in a volatile market.
2. Client Information Confidentiality and Data Protection
It is very important to maintain client confidentiality because any small lapse can lead to big liability claims. This will, in turn, impact your business’ value. Any weakness in terms of client data protection can easily lower the value of your business.
3. Regulatory Risks
This is fairly straightforward, and in a highly regulated market, it is essential to your value to stay on top of all the regulatory and licensing requirements. Failure to meet the state requirements can result in lowering your business’ value through fines, damage to repute, lawsuits, and closure of the business.
Get Business Valuation of Your Behavioral Health Business with Strategique Partners
It is very important to have behavioral health sector experts with know-how in healthcare business mergers and acquisitions to do your business valuation. Since Strategique Partners is linked with almost all segments of the behavioral business, from buying and selling to starting, running, and operating, it is most convincingly placed better than others to give you accurate financial valuation services. It does not matter if you are a business-eyeing seller or an investor interested in buying a business because Strategique Partners does valuation for all.
Join hands with Strategique Partners to make business valuations accurate in the behavioral health sector and book a consultation session from here now!
FAQs: Importance of Healthcare Business Valuation in Behavioral Health M&A
These are the most commonly asked questions about the importance of healthcare business valuation in behavioral health M&A:
1. Why Is Business Valuation Important in Behavioral Health Mergers and Acquisitions?
Business valuation in behavioral health M&A is important as it helps in the following aspects:
- Accurate Determination of the Financial Worth of a Company
- Negotiation of Fair Deals
- Compliance with State Regulations
- Informed Decision Making
- Attracting Potential Buyers or Investors
2. What Factors Does the Valuation of a Behavioral Health Business Depend Upon?
The value of behavioral health business is decided by some key factors. They have been listed here:
- Revenue Sources
- Accreditation
- Licensure and Regulatory Compliance
- Staff and Client Retention
- Market Reputation
- Payer Mix
- Operating Efficiency
3. How State Regulations Impact the Valuation of Behavioral Health Businesses?
The behavioral health market has a lot of regulatory obligations, and each state has its own set of requirements. These requirements are necessary to be fulfilled. This is why those businesses that comply with state requirements are valued highly. On the contrary, non-compliance or licensing issues can lead to penalties, decreasing the company’s market value.
Related Resources:
- Understanding Behavioral Health Mergers and Acquisitions
- Behavioral Health M&A Consulting Services: Common Mistakes and Solutions
- Healthcare Business Consulting: All You Need to Know
- Why Should You Hire Drug Rehab Consultants to Open Your Rehab Center?
- What Are the Benefits of Accreditations in Healthcare Business?
- HIPAA and Behavioral Health: Meeting Legal and Ethical Standards
- 5 Proven Strategies for Successful Behavioral Health Mergers & Acquisitions
- Insider Tips on How to Get a Behavioral Health License Successfully?
- How to Achieve JCAHO Behavioral Health Standards?
From Author
Business valuation is central in seeking financing, selling/buying, and merging or acquiring. As a seller, you wield considerable negotiating power by doing business valuation beforehand. It can help you market your selling prospect and may even keep you from selling it too cheaply. Similarly, if you are the buyer, valuation documents can help you analyze the future performance of the business you intend to buy and hence the fate of your deal. Furthermore, as a startup or established business owner in search of financing, you can lay forward your company’s business valuation documents to get financing sources, trust in your business, and invest. To add to that list, business valuations are the representative segment of behavioral health mergers and acquisitions. Therefore, they have a seminal role to play in behavioral health businesses. The business owners should plan to keep in view this fact and choose wisely about whom to partner with in doing business valuations.