While the health IT industry has remained very attractive to a broad range of acquirers and investors, there has been a wide range of valuation outcomes for companies. Idiosyncratic factors allow some health IT businesses to achieve superior valuations. Regulations, the pace of technology adoption, challenge of legacy entrenchment, and many other factors play a role. So what should executives of health IT companies focus on to break through the noise and secure one of the desired exit valuation outcomes? Here are a few considerations:

Focus on commercially driven demand vs. regulatory-driven demand

Companies that rely heavily on regulatory and compliance drivers have faced mounting uncertainty, multiple pivots, and regulatory risk that offset the inherent value created. Administrations change. Policies shift.  For this reason, it is better to be balanced, steering clear of a business model that is primarily or solely driven by regulations. For example, solutions built solely around Merit-based Incentive Payment System (MIPS) and the Medicare Access and CHIP Reauthorization Act (MACRA) have seen the slow roll-out of the regulations dampen demand. Also, businesses that flocked to build capabilities around the ACA online exchanges saw their hopes and markets dashed in the repeal efforts.

Provide solutions that address multiple adjacent use cases

While narrowly focused companies might achieve quick exits because they fill the white space for a company’s roadmap, this strategy narrows the buyer universe and weakens valuation. If you tackle a variety of problems first and foremost, you are more likely to be deeply embedded in your customers’ workflows. Moreover, you will offer a more compelling value proposition for a wider set of buyers. This creates competitive tension, which drives valuations up.

Target a large addressable market

Despite the fact that your business might be the digital health antidote we’ve been dreaming of, the welcomed disruptor with limitless potential is inevitably right around the corner. Even if you have first-mover advantage, given the ample access to early-stage capital in health IT, there will be many look-alikes in the market. Consequently, beyond articulating the distinct investment qualities of your company and your indestructible moats, it is crucial to point to a large (and expanding) market opportunity that gives your business sufficient runway to scale.

Demonstrate scalability

Whether you use Customer Acquisition Cost (CAC) ratios, Lifetime Value per Customer (LTV) ratios, gross margins or contribution margins, you must demonstrate that the core business can scale profitably. For an early stage company, show that the anticipated economic model is profitable. For a more mature business, show product level profitability and expansion opportunities with each customer. Note that your recurring revenues (actual and projected) will yield vastly superior valuations. Deals ultimately come down to financial metrics.

Have a data and a consumer game

It doesn’t have to be a core feature today, but as healthcare moves from being data-driven to consumer-centered, investors and acquirers will look to develop relevant capabilities. Is your data unique? Can you drive insights based on your solutions in a way that is invaluable? Can you ultimately deliver a better outcome for patients/consumers in a value-based driven world?

We expect health IT M&A deals to remain active. Understanding these dynamics and positioning health IT businesses accordingly are crucial to a successful valuation outcome and sale process.

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Kojo Appenteng is a Managing Director at leading healthcare investment banking firm, Edgemont Capital, where he oversees Health IT investment banking. Over the course of his almost 20-year career, Appenteng has executed transactions worth over $20 billion in aggregate across the health IT sector. For more information please contact Kojo Appenteng at Kojo@edgemont.com