« | Home | »

Healthcare Information Technology – Business Valuation

By Health Care Info | May 30, 2010



One of the most difficult aspects of the sale of a health information technology company is coming up with a business valuation. Sometimes the evaluation by the market (translation – a completed transaction) defy all logic provided. In other industries, there are some pretty handy rules of thumb for the valuation metrics. In an industry it may be 1 X Revenue, in others it could be seventh 5 X EBITDA. Since it is helping vitally important to our business, our healthcare information technology to maximize their business selling customer, I thought, these have been significant. Why do some of these software company valuations are so high? It is because of the leverage of technology profitability. A simple example is what Microsoft to produce additional costs for the next version of Office Professional? It’s probably $ 1. 20 for three CD’s and 80 cents for packaging. Suppose that the license costs $ 400. The gross margin is north of 99%. That does not happen in production or services or retail or most other industries. One problem with selling a small technology company in the health sector is that they do not use the brand, distribution or standards that have the big companies. So, on their own, they can not create that profitability leverage. The acquiring company, but do not want the small seller for the post-acquisition results that are directly attributable to compensate the buyer’s market presence. This is what we refer to as the valuation gap. What to do, we try to justify the purchase pays a much higher price than before the acquisition, financial evaluation of the target company. In other words, we want to preserve the strategic value for our vendors. Below are the factors that we in our analysis: 1 The cost for the buyer to write the code internally – Many years ago, Barry Boehm, in his book Software Engineering Economics, developed a Constructive Cost Model for projecting the cost of the computer code to write. He called it the COCOMO model. It was very detailed and complex, but I have boiled it down and simplify it for our purposes. We have the advantage that the estimate of the “projects” in hindsight, because we already know the number of lines of code from our customer products. In general, he projects that it takes three. 6 person months to write one thousand SLOC (source lines of code). So if you write to a senior software engineer at $ 70,000 fully loaded compensation package a program that saw 15,000 SLOC, your calculation is as follows – 15 x 3 6 = 54 months X $ 5,800 per person months = $ 313 200 to 15 000 € = 20 € split. 88/SLOC. Before you get with 1,000,000 million lines of code, your $ 20 than excited. 88 million business value, there are some caveats. Unfortunately, the market does not care and will not for what it costs to pay in order to develop your product. Secondly, this information is to help us understand what it costs for the purchaser to develop it internally, so he starts his own build versus buy analysis. Third, we have discounts for this analysis applies when the software is three generations old legacy code, for example. In this case, it is discounted by 90%. You are no longer use a technology sale with high profitability. They are is essentially the purchase of your customer base and the assessment not be as exciting. However, if your application is a completely new application that has the legs, start sizing your yacht. Examples of this could use a click fraud, Pay Pal, or Internet telephony. The second platform high value would be if you are your software technology, “Leap Frog” a popular legacy applications. One example is when we sold a company that was completely their legacy management platform in Microsoft rewritten. Net. They separated jump of the dominant players in this space, that support has several solutions of the second generation. Our client has a compelling strategic acquisition. Almost a year forward and I hear the purchaser sells one of these $ 100,000 systems per week. Now that the leverage! 2nd Most acquirers could write the code itself, but we recommend they analyze the cost of delay time to market. Believe me, with first mover advantage of a competitor or, worse, customer defections, there is a very real cost of not having your product today. We were able to convince a buyer that they be able to provide our sellers total purchase price based on the number of client defections justify their inclusion would have prevented. It turned out that the buyer had to install a huge base and has been through several acquisitions to deliver six disparate software platforms essentially maintaining the same functionality. This was very expensive to maintain and they went on those costs to their disgruntled installed base. The buyer was promising upgrades for a few years, but nothing was delivered. Customers were beginning to get big with their competitors. Our pitch to the buyer was to make this acquisition, show your customer that you actually offers an upgrade path and the notification of withdrawal of support for 4 or 5 of the other platforms. The acquisition was completed, and although their clients, the study leave were not immediately upgrade, they have not broken either. Apparently the devil that you know is better than the devil you not in the world of information technology in health care. 3rd Another arrow in the quiver driving our valuation models for our sellers that we restatement of historical financial data with the help of the pricing of the brand name acquirer. We had a client that a small company, the Health Care IT a fine piece of software that had developed favorably with a large, publicly traded company in the reference solution. Our product has the same functionality, usability and open system platform, but it was a very important difference. The end-user customer risk perception, was significantly higher with the small IT companies that could be “out of business tomorrow.” We were literally in a position to the financial performance of our customers in the paper twice and present a convincing argument to the large corporate buyers that the economy would be to him immediately after the acquisition. It was certainly not CAP Accounting, but it was effective as a tool to drive transaction value. 4th Financials are important, so we need to recognize this aspect of the valuation and buyer. We want to build a rule in a base value (addition, before we begin the strategic value components) of 2 X contractually recurring revenue during the current year. For example, if the company monthly maintenance contracts of $ 100,000 times 12 months = $ 1. 2 million X 2 = $ 2. 4 million enterprise value as a baseline component. Another component we add to all contracts to extend beyond one year. We estimate the gross margin produced in the years after years a firm contract and have a 5 x multiple, and that discount to present value. Let us an example where they had four years remaining on a service contract and the last three years was $ 200,000 per year in revenue with approximately 50% gross margin. We would be the final three years of annual gross margin of $ 100,000 and present value it at a discount rate of 5% earnings $ 265,616. This would be added to the previous two X-recurring income from Year 1 upwards. Again, this is financial analysis to establish a baseline before we pile on the strategic value components. 5th We try to assign values for miscellaneous assets that the seller offers to the buyer. Do not overlook the strategic value of blue chip accounts. These accounts are sold installed a platform for the buyer’s entire product suite following the acquisition in an “account.” It is much easier to add-on applications and products to sell into an existing account than to open it, that new account. These strategic accounts can have enormous value to a buyer. 6th Finally, we use a customer acquisition model, the value in the eyes of a potential buyer to drive. Let’s say that your sales staff earns 100% of the total salary and commission rate of $ 125,000 and sells 5 Net new accounts. This would mean that your customer base acquisition cost per account was $ 25,000. Add a company 20% overhead for the 85 accounts, would, for example, and the company value, using this method to be $ 2,550,000. 7th Our final assessment component is what we call the defensive factor. This is very real in the healthcare information technology arena. What is the value to prevent a large company, its competitor from acquiring your technology and improve its competitive position in the market. One of our clients had a database and results of nurse staffing software algorithm. The owner was a recognized expert in this field and the industry had credibility. This was a small application on two major industry players “integrated hospital-Suite-add applications. This module has been providing the functions of a slight advantage for the company that they were able to integrate with their main systems considered. The sale price for a This large software systems in a hospital chain was often more than $ 50,000,000. The value for our customers has been paid and not by the financial performance of our customers, but by the competitive advantages they could provide for the acquisition. Our customers have very well sell their company. After reading this, you can even say, come on, that’s a little far-fetched. These components have real value but this value is open to wide interpretation by the market. We try to metrics to a very subjective set of components assigned. The buyers are smart, and said the experience in M & A process, and honestly, they try to deflect these artistic approaches to driving, their financial burden. The best approach we have is know that these buyers that we will present the same analysis to their competitors and they do not know which component or components of the value that we have submitted to resonate with their competition. In the final analysis, we are just trying to offer the buyer some reasonable explanation for its board of directors to justify paying 8 X resources for the acquisition.

Related posts:

  1. Information Technology’s Impact in the Latest Stimulus Package We all know the U.S. economy has struggled and it...
  2. Data Protection Units And their Signficance to A Successful HealthCare Solution Business If you are in the field of healthcare, it is...
  3. Technology Update On Healthcare Industry And Importance Of Dental Healthcare This is determined as the management and treatment of diseases....
  4. Nursing Shortage Crisis! Over 76 Million Baby Boomers | Start a Nursing Agency or Medical Healthcare Recruiting Firm Business The healthcare industry is currently experiencing unprecedented shortages due to...
  5. Homecare Information Software And Services Market Shares, Strategies, And Forecasts, Worldwide, 2010 To 2016-Aarkstore Enterprise Announces LEXINGTON, Massachusetts (January 1, 2010) – that a new...

Related posts brought to you by Yet Another Related Posts Plugin.

Topics: Healthcare Problems | No Comments »

Comments