M&A Activity Continues in the Medical Physics Industry
January 22, 2019
How to Prepare Your Medical Physics Business for Due Diligence
For those owners who are contemplating a sale of their physics business, gaining an understanding of areas of focus during a buyer’s due diligence process is key to moving through the diligence process efficiently, maintaining value throughout the process, and reaching a successful conclusion.
“Due diligence is where potential deals often go to die, especially when sellers don’t anticipate what buyers scrutinize when weighing an acquisition,” says Greg Hogan, Director of SC&H Capital.
“Time kills deals, and missteps during the diligence process can result in failed deals or buyers seeking to lower the agreed upon value from the letter of intent.”
Sellers should be prepared for the following key areas of due diligence that many buyers will prioritize:
Accrual-based financial statements based on GAAP principles – Valuations for medical physics practices are largely based on multiples of EBITDA. However, many small physics practices may not routinely prepare GAAP compliant accrual-based financial statements. Beware of preliminary valuations based on EBITDA figures from cash or income tax basis financial statements as there may be significant differences in the EBITDA between cash and accrual basis financial statements. Buyers will perform a Quality of Earnings analysis to confirm the level of EBITDA of the target business during the diligence process.
Executed Customer Contracts – With the difficulty in getting some hospital systems to formally execute contracts, some medical physics practices may largely operate on a handshake agreement with their customers. However, buyers will be seeking to review and confirm the existence of executed customer contracts, especially for the target’s larger customer relationships. The lack of a formal executed contracts may lead a buyer requesting sellers secured executed contracts or to perceive a higher level of risk post-transaction for customers without signed agreements.
Employment Agreements – The labor market for boarded medical physicists remains tight and therefore, a company’s existing workforce constitutes one of the primary assets of a medical physics business in an acquisition. Buyers certainly prefer if target companies have employees under formal employment agreements with standard non-compete and/or non-solicitation terms. Absent employment contracts, buyers will be seeking to understand how physicists’ compensation compares to market as they assess the risk of post-transaction employee departures.
Forecasts and Pipeline – Buyers assign higher valuations to growing practices that can demonstrate year over year increases in EBITDA. Achieving a higher valuation assumes that the target company is forecasting continued growth and can demonstrate a customer pipeline that will support that projected growth.
Customer Retention Analysis – Visibility to future revenue and earnings is key for buyers as they evaluate the risk of any acquisition. As a result, buyers will diligence the year over year customer retention rates of a medical physics practice. To the extent that sellers can demonstrate minimal customer churn, buyers will be more comfortable with forward looking forecasts and perceive a lower level of post-transaction customer risk.
“Buyers of a medical physics business are going to perform the diligence they need to accurately project a company’s future revenue and earnings stream,” said Hogan.
“Sellers that are ready to respond to these key areas will be better positioned for a successful outcome.”
SC&H Capital has completed numerous transactions in the medical physics industry and continues to see an increase in prospective deals in this space. If you are considering a sale, or have been approached by a buyer, we encourage you to Contact Us in order to guide you through this process.
Greg Hogan is a Director with SC&H Capital and has more than 15 years of professional experience in M&A transaction, financial, and strategic advisory services. He has successfully advised buyers and sellers on a wide variety of corporate transactions valued at over a billion dollars.