The investment community’s interest in workers’ comp remains high. Not as high as it was a few years back when deals came almost every month, but high nonetheless. What’s different is the size of the investments we’re seeing, which isn’t a surprise.
As the industry consolidates, the companies in the sector get fewer and bigger, so the buyers these days tend to be either big “strategics” (companies in related businesses or in sectors that can create additional value via acquisition) or the relatively few very large private equity firms, many of which are already invested in the space.
We are also seeing wiser buyers.
Not smarter — almost all the people I’ve dealt with in private equity and investment banking are really intelligent — but many don’t have the wisdom that comes from experience in this space.
This wisdom comes from experience. Some transactions haven’t quite worked out the way the investors thought, for reasons both predictable and not (OneCall, York, Bunchcare, MSC’s pharmacy business). A few have worked out really well, but not because the core business idea and execution thereof was brilliant, but rather because the owner found some other investment firm to buy the asset (OneCall Imaging, initial York transaction).
This is a good thing.
A few years ago pretty much any company in the work comp space was a hot commodity, which is why we ended up with some deals that weren’t “deals” at all. Today, buyers are a whole lot wiser, ask way better questions, dig way deeper into stuff that matters, and perhaps most significantly, spend a lot of time getting to know management.
So, where are the opportunities these days?
What’s going to hold things up?
Owner expectations. Many of the owners I talk with have unrealistic expectations; they think their businesses are worth more than buyers will pay. That’s understandable; it’s also why we may see a hiatus as those expectations aren’t met, and sellers slowly acclimate to the idea that a 14x trailing earnings valuation isn’t going to happen for their company (which has decent, but not great, growth).
What does this mean for you?
Build your business around customer service, differentiate your brand and you’ll do well.
Joe Paduda is co-owner of CompPharma, a consortium of pharmacy benefit managers. This column is republished with his permission from his Managed Care Matters blog.
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