Factors in Physician Practice Valuation. May 2017

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1 Factors in Physician Practice Valuation May 2017

2 Factors in Physician Practice Valuation Physician practice owners considering a sale may not have experience assessing the value of their practices in terms of a private equity transaction. In a highly fragmented market, it is important to understand the valuation process and how to best position a practice for a successful sale. Two Key Factors in Practice Valuation EBITDA: Earnings Before Interest, Tax, Depreciation, & Amortization. This number is based on profitability and when combined with the EBITDA multiple will determine the value of a practice. Growth Potential: While the EBITDA multiple is based on several factors, the perceived growth potential of a physician practice has the greatest impact on the multiple. This perception can often be improved prior to a sale.

3 Physician Practice: EBITDA A physician practice must be valued before a physician exit or sale to a private equity firm or hospital. The most common earnings metric is EBITDA, or Earnings Before Interest Tax Depreciation and Amortization. EBITDA = Net profit + Interest + Taxes + Depreciation + Amortization Eligible candidates for a sale to private equity generally have a minimum of $2 million in EBITDA. Practices this size have an opportunity to increase EBITDA prior to the sale by reducing expensive, improving efficiency, and raising revenue - a heathcare consulting firm or investment bank can assist a practice with this process. In addition, an adjusted EBITDA provides buyers a more accurate assessment of practice value. This figure is based on fair market valuations, normalized income and expense reports, and the removal of irregularities. Some of these irregularities may include practice owner compensation, sale or purchase of additional practice locations, and the correct classification of practice assets.

4 Factors Driving EBITDA Multiples The EBITDA multiple is determined based on a number of components, with the most influential being perceived growth potential. Factors affecting multipliers include: 1. Perceived Growth Potential - Positive long term growth potential for a practice indicates sufficient opportunity for the addition of ancillary revenue streams or additional practice acquisitions. 2. Intangible Assets - These include electronic billing records, accounts receivable, existing work force, any current contracts and non-compete agreements, and the practice s brand value. 3. Practice Specialty - Certain physician specialties including those with diversified revenue streams are more appealing to private equity firms. A practice s sale price is generally determined by multiplying adjusted EBITDA by the multiplier. The average multiple in the healthcare industry is 6x, and is calculated using a number of practice-specific factors. 4. Patient Base - A practice s patient base may change the perceived value of the practice. This considers whether patients have conditions requiring regular or irregular visits. 5. Practice Location - The size of metropolitan area, demographics and health of the population can add to practice value. 6. Payer Mix - Diversified payers and a higher percentage of patients with commercial insurance are preferred. 7. Economic & Reimbursement Climate - While this is difficult to predict, current political climate and speculation regarding healthcare regulation and reimbursement can affect perceived practice value. 8. Referral Patterns - Although many physicians continue to work after a private equity sale, patient referral patterns are an important part of practice valuation.

5 Maximizing Practice Value Prior to a sale to private equity, it is critical for a physician practice to work with a professional healthcare advisory services firm to determine what short-term steps can be taken to maximize practice value. Consider Paragon Health Capital s healthcare advisory service team as your advocates in this process. Paragon s steps to maximizing practice value include: Performance Assessment The evaluation of key opportunities for revenue enhancement, expense reduction and practice efficiency to substantially improve measurable performance. Provider Scheduling & Capacity Practice schedule should be configured for maximum productivity based on accurate appointment minutes and correct reporting. Payer Contract Review A review of payer contracts should be completed to determine what is being paid and when, as well as the percentage of payers with commercial and government-funded insurance. Accounts Receivable Management The accounts receivable process should be optimized for maximum fee collection in a timely manner and with the inclusion of proper self-pay options. Revenue Cycle Optimization Steps are taken to minimize the time between a patient s scheduled appointment and the collection of payment. The inclusion of point-of-service deductible and co-pay collection can aid in a more efficient turn around. Revenue Stream Addition The physician practice market will be evaluated to identify potential additional revenue streams to be added on to practice services. This may include out-of-pocket treatments such as med spa packages, specialty products or prescriptions, or in-house lab work. Practice Acquisition In some markets, a quick acquisition of a smaller or several smaller practices can drastically increase perceived growth potential and actual revenue. This immediately increases practice valuation.

6 Paragon Health Capital was founded to offer physician-focused investment banking and business brokerage services, in addition to offering more traditional transaction and provider consulting services. Paragon takes great care in matching physician practices with the optimal outcome for practice owners, primarily with private equity firms through management recapitalization. Paragon Health Capital 950 E State Highway 114 Ste. 160 Southlake, TX