Many are asking great questions about corporate buyers and the effects of the rising interest rates and inflation on practice values.
The market continues to expand as corporate buyers, like traditional ones, see the value in healthcare. I may sound like a broken record, especially now that we are two years past those initial dark days, but healthcare has proven it is recession and pandemic resilient. People simply need humans to take care of them. Rates of return on healthcare businesses are 8% or more depending on cost structures. An individual doctor will always intend to purchase a practice unless they want to be a career associate. A corporate will go after an office
where not only improvement in gross can be made through the increase of hours and services but of course in trimming expenses as well. Vendors may not like their hard work broken down into “simple numbers,” but the reality is that numbers drive corporates. It is just business. Sometimes, corporates will pay more than an individual doctor and other times not. Ultimately, a vendor must put personal feelings and ego aside to make the decision that makes the most sense for them.
These past couple of years have certainly been interesting ones. Despite a pandemic and increasing inflations, values have remained strong. When we look back at historical sales, despite fluctuations in rates, we can make the same comment.. Good news – historically, despite the varying rates, practice values have continued to rise. They may jump more in value at certain times and less in others, but the actual values
have not decreased in my 30 years of being in this industry. This is simple economics – supply and demand. There continues to be more buyers than good practices available. The vendors who may have chosen to delay due to the pandemic, by holding on to their practice, continue to put pressure on purchasers who are looking for something to buy. Lenders also continue to fund these acquisitions provided that the buyer can qualify. If this cycle continues, values will not be negatively impacted.
Can the rise in interest rates affect a practice value? My initial answer is no BUT I do feel the need to qualify my response. There are certain transactions that a bank will not provide 100%, which means the buyer must put some money into the deal to successfully close. This does not mean the practice is overvalued. It simply means that based on risk, a lender is comfortable in financing only a certain percentage. The market has been trained in the past 20+ years to expect 100% financing; however, many factors have significantly changed, such as increased practice values along with the increased personal debt load of purchasers. Practice value is not synonymous with level of financing. Values are separate from the level of financing a bank will offer a purchaser; for example, an insurance brokerage will sell for 12-15x EBITDA, yet lenders do not finance this level.
Inflation can cause practice values to decrease. It is quite simple – the more expenses rise (staffing, supplies, PPE), the more the net profit is negatively affected and, as such, value is impacted. Before anyone opines as to whether higher rates and inflation impacts value, the real assessment is how these factors affect a practice on a case per case basis. A blanket statement is always a dangerous thing to make. It should also be noted, the final practice value is truly determined by the price a vendor and purchaser agree to. Even if increased expenses bring
value down, a buyer can still offer more if they see opportunities in the practice.
About the Author
Jackie Joachim graduated from the University of Toronto with a Bachelor of Arts degree in Business and has close to 30 years of experience in the health care sector. She is currently the COO at ROI Corporation. Jackie has developed and delivered seminars to healthcare professionals across the country, and coached hundreds of practitioners for planning, marketing, patient education, human resources and financial management.
