Healthcare Sales and Acquisitions: The Value of a Company’s Workforce

Recent developments in the nation’s labor force and employment market are dramatically affecting the sale and acquisition of healthcare providers.

Assessing a company’s tangible and intangible assets is key to the transfer of assets between provider organizations such as hospitals, physician practices, surgery centers, and clinics. Tangible assets include physical assets or property owned by a company, such as land, buildings, equipment, and physical inventory.

Intangible assets not only include intellectual property, such as patents, copyrights, trademarks, and trade secrets, but also may include goodwill, brand equity, customer lists, research and development activities, and more. Intangible assets lack physical substance but create value and potential revenue by differentiating a business from its competitors.

In many cases the value of intellectual property and intangible assets is far greater than that of the “hard” assets. Right now one of those valuable intangibles — the assembled workforce — is undergoing dramatic changes. The assembled workforce is the value of a company’s employees. In personal services industries such as healthcare, patients keenly focus on the quality of employees, including courtesy and interpersonal skills among the office staff; clinical expertise; and the personal skills of all levels of clinical staff, from techs to doctors.

Human Capital Intangible Assets

The assembled workforce falls into the category of human capital intangible assets. Employment contracts and non-compete agreements are other assets in this category.

Because patients closely scrutinize employees in provider organizations, a provider’s assembled workforce is often the largest intangible asset for sales and acquisition transactions.

Labor experts have pointed out that national events over the past two-plus years significantly impacted employees’ attitudes, expectations, and requirements for employment. As a result, employers are more willing to increase wages and grant employee concessions. These dynamics have shifted the labor supply and demand functions and dramatically increased the value of a company’s assembled workforce.

The value of healthcare employees is increasing at all levels. The number of open positions in the general labor market means office, administrative, and clerical staff can find more appealing, next-level jobs in other industries.

Nurses are in especially high demand. Burnout and difficult working conditions, in part due to COVID risks, are affecting the number of nurses available for inpatient staffing, as is increased retirement among the large cohort of nurses who graduated in the 1970s. Costs are also on the rise as more become travel nurses, a position that can earn $3,000 or more per week and allows nurses to choose where and when they want to work. To combat a shortage of full-time staff nurses, hospitals have increased their per-diem hourly rates to levels close to those of travel nurses.

The value of an organization’s current nurses has also increased due to the changes among new nursing graduates. COVID has extended the time to graduate and new graduates often come with very limited clinical practicums due to on-site training restrictions.

Valuation Approaches, Methods, and Procedures

The three industry-standard valuation methods — the market approach, the income approach, and the cost approach — play a role in the valuation of a company’s workforce. The market approach is based on the economic principles of competition and equilibrium. It includes competitive wage rates and salary survey information. The market approach is useful in determining competitive salary ranges.

The income approach is based on the concept of future or increased earnings as a result of having trained employees or those with a particular skill. This expectation of future economic income is converted to a present worth — i.e., the value of the assembled workforce.

The cost approach is based on the economic principle of substitution. Under this approach, the purchaser pays no more for a group of employees than the cost to create and train a staff with equivalent skills and value.

Replacement Cost Method

Analysts typically attempt to value human capital using all three valuation approaches in some way; however, the replacement cost method is the most common for valuing workforces. It estimates the cost to re-create a workforce from scratch.

The replacement cost approach to workforce valuation includes the following clearly defined factors:

• Recruitment expenses;
• Salary;
• Benefits;
• Bonus;
• Moving Expenses;
• Training costs; and
• Weeks to full productivity.

The following additional cost or value factors may also be considered:

• Advanced credentials.
• Seniority (greater than 3+ years).

These cost and value elements form a template that presents a detailed analysis of the cost of re-creating a company’s workforce.

A company’s workforce may be valued as a separate intangible asset when goodwill is not valued. However, it is important to note that when goodwill is present, under FASB guidance ASC 805-20-55-6, an assembled workforce is not a separate asset and its value is subsumed into goodwill.

The seller and the buyer will have different assessments and views on the value of a company’s workforce. Marcum has experienced professionals in many sectors of the healthcare industry with proven skills in valuing an assembled workforce from the perspective of both buyers and sellers. Marcum also has experience helping buyers and sellers resolve transaction disputes that may arise given the various ways industry participants assess the significance of human capital and other intangible assets.