Mergers & Acquisitions: Assess risk and value

A. Here's a step-by-step approach to protect your investment:

Understand how valuation works 

Company value is an estimate of future earnings based on past earnings, influenced by both quantitative and qualitative vectors. Quantitative vectors include earnings and related EBITDA. Qualitative vectors include company specific risk, reimbursement rates, and industry trends.   

Understand how events change value

Suppose a DME company has $200,000 in year-end 2015 EBITDA. Changes in Medicare reimbursement will impact that company's 2016 EBITDA according to the following formula: Value = EBITDA/(risk-growth). As you can see, both vectors must be considered in estimating company value. Note, though, that decreases in Medicare reimbursement will cause a reduction in projected EBITDA that cannot be offset by growth. 

Evaluate the vectors you can control

Although you cannot control external risks, you can reduce your company specific risks. An excellent example of this is your future cash flows, where your stakeholders recoup ROI. To mitigate this company specific risk, you internally improve your operating efficiencies, and reduce your inefficiencies and decrease risks. Other areas to assess are leadership, personnel, operations, sales, finance, marketing and legal.  

Take action to improve controllable vectors

You are now ready to increase your company's valuation. In each area, identify the specific operating risks, develop an action plan to address those risks, and take action and measure the results.

Brad Smith is managing director/partner at Vertess. Reach him at bsmith@vertess.com.