Mistakes are magnified in frothy capital markets when transaction prices and deal multiples are high.
The healthcare sector continues to garner the attention of investors as private equity investment and consolidation drive multiples higher across the healthcare spectrum. Elevated multiples paid on healthcare businesses call for expert financial due diligence and quality of earnings analyses to navigate the nuances of each subindustry and provide investor protection. Working with clients across the healthcare investment spectrum – from private equity to strategic buyers – on deals ranging from large, platform businesses to small, tuck-in acquisitions, we’ve observed many reporting mistakes and neglected risks. Based on these experiences, here are our top five lessons to consider during your next deal:
Lesson 1: It’s (Mostly) All About Revenue
Allocate adequate time to thoroughly assess revenue.
Lesson 2: Accrual Revenue Estimates Require Frequent Back Testing of Collectability Assumptions
Run your own revenue analysis and compare it to management’s estimate.
Lesson 3 – Cash to Accrual Conversion Creates A More Informed Buyer
Converting cash to accrual produces a clearer picture of current operations.
Lesson 4 – Don’t Blindly Rely on Audited Financial Statements
Reviewing audited financials are a good first step, but they’re ultimately management’s representation.
Lesson 5 – Not All Healthcare Verticals Are the Same
Understand value drivers and inherent risks associated with your target’s subindustry.
Learn more about these top five lessons learned to protect investors.
Editor's note: this article originally appeared on VMG Health's website.