So, You Paid $67 Million for Intangible Assets?

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Over 80% of the value of the S&P 500 index is in intangible assets, and similar trends are evident in healthcare organizations. This article identifies common intangible assets in healthcare businesses.

Congratulations! You closed on your acquisition and bought a very profitable healthcare service business for $70 million. Upon review, you purchased $67 million of intangible assets and $3,000,000 of used equipment. In case you are feeling some buyer’s remorse, let’s review some of the intangible assets you just purchased.

1) Certificate of Need (CON) In some states, CONs grant healthcare businesses with a protected legal right to provide specific services within a defined geographic area. The granting of CONs may be limited as a function of population or a ratio of existing facility beds or operating rooms to the number of patients treated in the market. Without CONs, these entities cannot operate in some states. A significant amount of time, cost, and risk may be associated with CON procurement.

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Existing CONs, state licenses, Medicare certifications, and accreditation all save business buyers time and money

2) State License Generally, most healthcare businesses must be licensed by a state department of health to operate. Factors like facility architecture, policies and procedures, staff credentials, and equipment maintenance may all be assessed during initial and subsequent state licensure inspections.

3) Medicare Certification Like state licensure, substantial time and money is attributed to achieving Medicare certification. Buying a business that is already certified by Medicare gets buyers to market quicker than going through the certification process themselves.

4) Accreditation Medicare permits providers and suppliers accredited by an approved national accreditation organization to be exempt from routine surveys by State survey agencies to determine compliance with Medicare conditions. Therefore, accreditation may be a substitute for Medicare certification.

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It takes time and money to develop a trained workforce

5) Trained Workforce Substantial costs for recruiting, selecting, and training would be required to replace employees with individuals having comparable skills and expertise. Buying a workforce-in-place avoids these costs. The advertising, recruiter fees, signing bonuses, and relocation costs to develop a trained workforce can be costly.

6) Non-Competes Covenants not to compete enable buyers to mitigate the potential loss of forecasted revenues that may occur as a result of competition from previous owners.

7) Trade Name, Telephone Number When one business is acquired by another, rights to the trade name and telephone number of acquired business are transferred to the buyer. Sometimes keeping the old business name and telephone number secures existing customers who might otherwise be lost. This portion of the business earning is attributed to these intangible assets.

8) Customer Relationships In the healthcare industry there are federal anti-kickback regulations that prohibit paying money to acquire Medicare and Medicaid patient referrals. Therefore, you do not often see customer relationships booked as an intangible asset after an M&A healthcare deal. However, some healthcare businesses that have lots of repeat patients and few or no government payors (i.e., dentistry and cosmetic surgery practices) may still book some intangible value to customer relationships.

9) Goodwill Business goodwill is an intangible asset that represents the portion of the business value that cannot be attributed to other identifiable business assets. Essentially, goodwill is the placeholder where all un-identifiable intangible value is booked.

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HCTadvisor provides healthcare-focused business data. Contact HCTadvisor today at (303) 800-6444.