What is a healthtech software company worth?

A healthtech software company differs from ordinary software in what its revenue rests on. Its revenue sits on top of two things the owner does not fully control: customers who carry heavy health-privacy duties of their own, and a regulatory position on what the product actually is. A buyer can start from the recurring revenue and ask two questions. How much of it will survive a change of owner, and how clean is the privacy and regulatory file behind it? Much of the conversation is about contracts, integrations and paperwork, and the sections below describe how each can be read.

What a buyer is paying for

The first thing to look for is switching cost. If the product reads from and writes to an electronic medical record (EMR) or electronic health record (EHR) system, so that clinic staff do their daily work through it, replacing it means retraining people and rebuilding the connection. That stickiness is worth asking about when a buyer reads recurring revenue from a product like this, because it bears on how likely customers are to stay. The second is contract shape. Clinics, health authorities and hospitals that sign multi-year terms give a buyer a visible runway, while month-to-month subscriptions from small clinics give less even when today’s revenue is identical. The third is a clean position on whether the product is a regulated medical device. A buyer may pay for each of these only to the extent it can be shown on paper, so a company with strong retention and thin documentation may be priced below a similar one with its file in order.

Why the integration cuts both ways

An EMR integration is also a dependency. The connection exists because another company, the EMR vendor, permits it, and the product may rely on credentials or a certification that the vendor issued. It is therefore worth asking how much revenue would stop if the vendor changed its terms or withdrew the certification. If many customers use the product only because of one integration, that share of revenue is less secure than its contract term suggests. A buyer that already has its own relationship with the EMR vendor can ask whether that relationship changes the risk.

What gets discounted

Several problems can lead to markdowns in this sub-sector.

• Regulatory ambiguity. A feature that might cross from administration into diagnosis, monitoring or treatment decisions exposes the buyer to a licensing question, and an unresolved question can be priced as risk.
• A gap between claims and practice. If the sales material promises a standard of data handling that the systems do not meet, a buyer may discount for the cost of fixing it and for the liability in the meantime.
• Consent-to-assign contracts. Clinical and institutional agreements that need the customer’s consent to move to a new owner put part of the revenue in someone else’s hands.
• Concentration. BDC cautions that a business will not get full value if it carries customer concentration risk. With a handful of health authorities, one non-renewal can change the revenue a buyer can rely on, which is a reason to examine customer concentration early.
• Knowledge held by one or two people. Integration know-how and clinical workflow judgment that live in the founders’ heads must be retained or replaced, and a buyer may price that cost.

How the earnings get recast

Recasting can start as it would for any small company. Owner pay can be compared with what a replacement would cost, and personal or one-off costs identified. BDC lists discretionary and non-recurring expenses and management compensation among the records a valuator typically reviews. Healthtech adds adjustments of its own. One is separating recurring subscription fees from implementation, training and custom-integration work, because the second group does not renew itself. Another is research tax credits. Scientific research and experimental development (SR&ED) claims are submitted with the corporation’s income tax return, and the CRA describes a review process for claims that need one, so a buyer can ask for the claim files and any review correspondence before treating the benefit as normal earnings.

Why two similar-looking companies price differently

Take two products with the same number of clinic customers and similar revenue. One books appointments and sends reminders. The other analyzes results and flags patients for follow-up. The second may be worth more to a clinic, but it raises a regulatory question the first does not. Whether a given feature brings a product within Health Canada’s medical device rules is a question for the department’s own guidance and a regulatory specialist, not for this page. If the owner has never put the question in writing, a buyer may price the chance that the answer is unfavourable. Privacy works similarly. Ontario’s privacy commissioner describes the duties the Personal Health Information Protection Act places on health information custodians, and Quebec’s private-sector rules were changed by Law 25. A vendor whose customers sit under these regimes may be asked how the product helps them comply, and showing it is worth more than saying it.

Who is doing the pricing

Buyer type can shift what carries weight. BDC lists the buyer’s strategic interests among the things that affect a final price and says a strategic buyer is often willing to pay more because it sees synergies. For this sector that could mean a larger EMR or healthtech platform that can fold the product into its own offering, or a health system or provider group buying a tool it already depends on and valuing continuity and control. For a financial buyer, whose return depends mainly on the recurring contracts, consent-to-assign terms and regulatory clarity bear directly on what it can count. Multiples quoted for software in general are illustrative only and can say little about a business that carries a licensing question and a consent process. An owner who wants a number should see whether a professional valuation is worth it.