Determining Your Organization's Value
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Last year, two New York City healthcare facilities—MJHS and Jacob Perlow Hospice from Beth Israel Medical Center (a member of the Continuum Health Partners Hospital Network) merged. The transaction, which made MJHS the largest not-for-profit hospice and palliative care program in the state, was just one among scores of healthcare mergers nationwide.
These days, many providers are looking for ways to integrate with other hospitals or health systems as an avenue to improve their strategic position, which makes alignments, mergers, and acquisitions busier than in years past. But to complete such transactions, a value must be assigned to the healthcare provider. Conducting a valuation is a complex undertaking, and getting it right is essential if all parties in an M&A are to be satisfied.
A $725 million net revenue provider, MJHS consists of skilled nursing facilities, health plans, adult day healthcare, home care, pediatric home care, and hospice care. Al Balko, executive vice president and COO at MJHS (formerly Metropolitan Jewish Health System), says the provider was looking to grow its market share when the opportunity to purchase Jacob Perlow Hospice arose. That’s no easy feat in New York, a highly regulated, certificate-of-need state with a limit on licenses. So when a request for proposal process began for Jacob Perlow Hospice, MJHS put in an offer.
“Hospice and palliative care is without question a growing segment in healthcare. We had our own hospice and this was an opportunity to buy [a site] and provide access to a different referral base,” says Balko. But, the $8 million purchase (excluding working capital) couldn’t be completed without a valuation—a process that included more than a few parts of the organization.
Balko says that the process included staff from finance, legal (internal and external), and operations, as well as individuals from the quality and technology departments. “If you’re selling a business or you’re potentially buying one that’s up and running, you need to make sure the staff is in place … you don’t want to be in a situation where you complete the process and say, ‘What do I do next?’ ” he says.
In a November 2010 HealthLeaders Media Intelligence Report, Hospital Mergers & Acquisitions: Opportunities and Challenges, the No. 1 reason given by finance leaders for the termination of an M&A deal was a lack of agreement on the valuation. Moreover, next to access to capital, CFOs ranked gaining agreement on a valuation as the most challenging part of the process.
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