Industry Focus

An efficient transaction This is the first of a two-part series from KPMG Corporate Finance's Mergers and Acquisitions team that focuses on doctor-owned medical practices, but also has application for broader medical groups WORDS: BRENDAN LARSEN, NICK HEGGIE AND NICK YOUNG growing. Clearly an opportunity exists for healthcare business owners to capitalise on pricing levels, which are currently at their highest. Transactional challenges for business owners Despite these favourable conditions, it is important for healthcare business owners to understand that positive investment sentiment alone will not ensure a successful outcome. In fact, even the most profitable healthcare businesses are often perceived as 'un-transactable' by potential investors due to a number of factors, including: Reliance on personal goodwill Many medical businesses are reliant on the goodwill of doctors (who, in many cases, are also owners), meaning individual doctors own both the relationship with referring practitioners and the relationship with patients. From an investor's perspective, in the event of a standard sale/purchase transaction, there is significant risk that the major 10 Industry Focus HEALTHCARE Understanding pricing trends in the healthcare sector means business owners will be aware of the obstacles that can emerge during transaction processes and implement strategies to combat these. This feature offers expert advice on strategies, some of which can be implemented in the years preceding a transaction—to pre-empt and negate the challenges, which will lead to optimal pricing and favourable deal terms for owners of medical businesses. Healthcare businesses are valued investment propositions The healthcare sector has always been viewed as inherently attractive to corporate investors and financial sponsors (for example, private equity funds), largely because of the unceasing demand for healthcare services. This investment appetite has become even more apparent during these recent times of variable economic conditions when investors have sought mature, stable industries with a theme of recurring earnings. In Australia, this appetite has been enhanced by favourable demographic trends (such as Australia's ageing population) and wider macro-economic conditions (such as generally positive levels of government funding support). As demand has increased, so has pricing/valuations for businesses operating in the sector. A common metric used to gauge prevailing valuation conditions is comparable earnings multiples. In simple terms, the higher the multiple, the more investors are willing to pay to obtain an equity stake relative to the business' earnings (see Figure 1). Pricing for healthcare businesses has outperformed the broader share market in the past five years, and if recent trends continue, the disparity will continue Figure 1. Comparable trading past: five years. Compares earnings multiples for the healthcare constituent of the ASX 200 market index with that of the broader ASX 200 index. 19.00x 17.00x 15.00x 13.00x 11.00x 9.00x 7.00x 5.00x 18/03/09 23/10/09 03/06/10 07/01/11 16/08/11 23/03/12 30/10/12 07/06/13 14/01/14 Source: Capital IQ Database

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