Selling a Medical Billing Company

Selling a Medical Billing Company

Posted on December 16, 2016
We just sold our 3rd medical billing company in 2016.  While each transaction was different, there were a few key value drivers that buyers focused on.  The industry appears to be very fragmented with many small and medium-sized companies performing billing activities which means the consolidation should continue.

Medical billing and coding is a thriving field and is expected to keep growing for the next several years. According to the Bureau of Labor Statistics Occupational Outlook Handbook, medical billing is expected to increase by 21 percent between now and 2020. This represents almost double the average growth for all jobs in the United States over the next ten years.  The move toward digitization of medical records means that more doctors and hospitals will require the services of medical billing and coding technicians to handle the increasing amounts of medical information necessary to put all records in digital form. The move toward the digital format for medical records is expected to increase in the future as more technology becomes available to make this task easier.

When thinking about selling a medical billing company – as with any company – you need to look at valuation.  Here is a general idea on how to establish a value:
  • 80% of annual revenue
  • 2.5 – 3.0 times Seller Cash Flow
  • 3.5 times EBITDA
While these formulas will give you an idea on value, there are several other factors that buyers are looking for and can drive value.

Client Concentrations

Many small billing companies will have a client or provider that accounts for 30% or 40% of the total revenue.  Obviously, this is a major concern for a buyer due to the risk of losing that client.  We dealt with this issue on all three of the recent sales.  Having contracts in place helps, but be prepared that a buyer might want to talk to a large client prior to sale and get a feel the likelihood of retaining them.  If you totally refuse to let this happen, it’s best to set that expectation early in the process.

Contracts and Billing Rates

Most medical billing companies have their clients under contract.  The length and assignability of those contracts are important to determining value.  Buyers are most concerned about losing clients in the first 90 days after the transaction.  If they can be protected by a solid contract, that alleviates the concern.  The contract also defines the billing rates for the clients.  Typically, the rate is 5% to 8% of the amount collected.    However, some international billing companies can charge as little as 2%.  It’s important to look at the services being provided and determine if the billing rate fits into their model.

Deal Structure

While client retention rates are typically very high in this industry, it is not uncommon to lose a client to retirement, hospital buyout, bringing the billing activities in-house, or a less expensive billing option.  Because of this, most buyers are going to gravitate towards some type of earnout.  Although none of recent transactions in medical billing had an earnout, buyers certainly pushed for it.  If a seller is looking for a quick sale, an earn out is probably a necessity.  

If you have been thinking about selling a medical billing company, Indiana Equity Brokers can help you position the company to maximize its value.