Part 1.5 of Valuation Basics – Revenue (Follow Up)

I will still post the COGS article this weekend, but in thinking about COGS I realized there were a few thoughts I forgot to mention about revenue.

The following is a broad generalization for general practice (GP) companion animal hospitals. Every hospital is unique and results will vary, but I believe this high-level framework for revenue should be considered as it will impact your hospital valuation.

For every $100 of revenue increase, typically only 40%-60% of the revenue will drop to the net income (margins/cashflow/valuation EBITDA).

• If you are seeing less than 40% of revenue drop-through to your net income…do you know why? If you are above 60%…is it sustainable, as this may not be a good thing.

For every $100 of revenue decline, you should expect 80%-100% impact/decline to your net income (margins/cashflow/valuation EBITDA).

• Have you identified which fixed costs can be treated as a variable cost? Which variable costs will be your go-to choice to manage this period of revenue decline?

Another way to think of the above is to ask yourself…do you have a pro-active plan to maximize and sustain periods of revenue growth? And equally important, do you have a pro-active plan to minimize periods of revenue decline? I believe many hospitals experienced both recently during this unprecedented pandemic.

Reacting to revenue growth or decline is not the same as having a plan. If you haven’t written down your plan and reviewed/discussed with at least your key hospital associates, you do not have a plan.

Speaking of the pandemic, have you itemized your COVID-19/pandemic revenues and expenses? Have you clearly identified and labeled PPP income and pandemic expenses in your P&L? They should be treated as non-recurring income and expenses, and not co-mingled with your regular hospital operations. Do not assume the corporate consolidators will address these non-recurring or one-time events correctly in your hospital valuation. This is true for GP as well as Specialty and Emergency/Referral hospitals.

Please stay tuned for the COGS article because this is where the real fun begins…