When preparing to sell or buy a medical laboratory, it’s essential that you first conduct a thorough valuation in order to ensure the deal will be financially viable for your future plans. A variety of factors can influence the final price, ranging from revenue cycle health to regulatory compliance.
During a recent webinar, we welcomed Derek Taylor, Managing Vice President of Laboratory Nexus, to offer an overview of key considerations for how to understand the true value of a lab ahead of a sale. Check out the guide below for more tips to ensure you’re well-prepared before finalizing any sales agreements or purchases.
Financial Overview and Key Metrics
For small and medium-sized laboratories, the most common method of valuation revolves around net profit, typically using EBITDA (earnings before interest, taxes, depreciation, and amortization) as a basis. In the current market, laboratories often sell at a multiple of four to six times their EBITDA, Taylor says, though this can vary depending on the lab’s unique circumstances.
Potential buyers tend to prioritize financial stability, usually reviewing a lab’s financials from the past three to five years. To prepare, it’s recommended to review financial statements periodically, ideally working with a CPA at least once a year. This can reveal opportunities to increase revenue, such as adding new testing lines or acquiring other labs and identifying areas to cut unnecessary expenses.
Insurance Contracts and Credentialing
One critical factor influencing a lab’s value is its in-network insurance payer contracts. Many buyers look for labs with specific contracts in certain regions, making this an attractive selling point. While it’s not always simple or straightforward, you can enhance your lab’s marketability by expanding your in-network credentialing list.
Derek Taylor, Managing Vice President, Laboratory Nexus
While billers can sometimes assist in securing new contracts, there are also dedicated payer strategists, such as our team at Lighthouse, who focus on gaining entry to narrow and closed networks. However, you approach contracting, having a robust list of credentialed payers will appeal to potential buyers.
It’s also essential to review your existing contracts, ensuring they are transferable and free of disputes. Doing this at least once a year can prevent complications during due diligence. Lighthouse Lab Services offers specialized help in this area, reviewing current contracts and assisting with new credentialing.
“From a due diligence perspective, it’s helpful to know what contracts you have already in place and also whether they are transferable,” Taylor advises. “You should be reviewing your credentialing list and strategy in that area at least once annually.”
Regulatory Compliance and Accreditation
Compliance with Clinical Laboratory Improvement Amendments (CLIA) is a standard requirement for all labs, but many buyers seek labs with additional accreditations, such as College of American Pathologists (CAP) accreditation. Labs with this accreditation often command a higher value in the marketplace. If you’re looking to enhance the value of your lab, consider obtaining CAP accreditation or other relevant certifications.
Additionally, states such as New York sometimes require additional licensing based on the type of testing a lab performs. Your lab will be more attractive to buyers in these areas if it already meets all licensure requirements.
Inspection History and Quality of Testing
Quality and compliance are paramount in determining a lab’s valuation as potential buyers will scrutinize inspection histories and reports during the due diligence process. To prepare, it’s beneficial to audit your own laboratory to ensure it meets all necessary standards before listing it for sale.
Consider bringing in an external party like Lighthouse to conduct a mock inspection, identifying any areas that may need improvement. This proactive approach can smooth the path through the due diligence phase.
Billing Systems and Revenue Optimization
Billing inefficiencies are another area of importance that can drastically affect a laboratory’s valuation and its potential to sell. Whether your lab uses internal billing systems or outsources to third-party companies, it’s crucial to review and audit these systems regularly to ensure your process is both efficient and compliant.
A billing audit can uncover missed revenue opportunities and other errors, all of which can be addressed before a lab is listed for sale. Lighthouse’s RCM Solutions Team specializes in this area, working with labs to identify and address any issues in order to maximize collections upfront and minimize backend denials.
Ensuring a lab’s billing is optimized not only increases revenue but also prevents complications during due diligence. Lab deals can slow down significantly when billing inconsistencies arise, so understanding and optimizing your billing practices is key to ensuring a smooth transaction.
Conclusion
Properly valuing a medical laboratory requires a multifaceted approach, from ensuring solid financials and expanding credentialing to maintaining regulatory compliance and optimizing billing systems. By addressing these factors early, you’ll increase your lab’s marketability, streamline the selling process, and maximize its value for potential buyers.
If you’re seeking an end-to-end solution for preparing every aspect of your laboratory for a sale, or if you’re a buyer performing due diligence on a potential purchase, please reach out to us directly for a complimentary consultation. Our deep roster of experts are available to answer any questions you have and give you peace of mind before you execute your lab sale or purchase.