Addressing More Urgent Care Red Flags
Last week, The Ambulatory M&A Advisor detailed solutions to five urgent care red flags featured in Part 1 of a 2-part series. This week, Blayne Rush, urgent care M&A broker and publisher of The Ambulatory M&A Advisor offers solutions to sellers on how to address the red flags mentioned in the second part of the series. The red flags featured in Part 2 of our series included: adjusted EBITDA, consolidated financials, incorrect contracting of providers, bundled services and discrepancies in revenue. Sellers that have their financials up-to-date and organized will have an easier time catching a buyer’s attention.
Are you on a cash-based accounting system? Rush says that most small urgent care businesses are. A cash-based accounting system is easy to keep track of if you only own a few centers, but for owners with multiple centers, switching to accrual-based accounting will make you more attractive to prospective buyers.
“Accrual-based accounting takes into account a lot of things that aren’t on the books, like the outstanding accounts payable and the paid-time-off accrual,” Rush says. “You need to have some documentation of the issues that are outstanding, and this needs to be revealed to the buyers upfront.”
In addition, Rush says that you should also go through your financials and re-cast them, or normalize them and remove any one-time expenses like trail advertisements or donations to your church. After that, you can negotiate with buyers what should and shouldn’t be added back.
“You want reliable financials to provide a picture of the health of each and every center,” Rush says. “Cleaning up your financials can make things easier to understand.”
Unclear, consolidated financials make it difficult for buyers to determine how much a center is truly worth. If you have multiple centers offering multiple services, it’s hard to determine which center, and which service, is generating the most revenue. In order to clear things up, Rush says to start by breaking down your financials by each individual center.
“Break the centers down into Center A, Center B, Center C, Center D, etc., and then under each center, break down each service offering, the revenue produced by it, and the revenue produced by the center,” Rush says. “After that, you want to break down your expenses: the providers and the supplies for each service and each center.”
By breaking down your financials, you can see how each individual center is doing. For example, if you have four centers, and three of them are producing 100% of your revenue, you want to be able to look at that and realize that it could be beneficial to your valuation if you closed down the fourth center, or removed it from the equation. Your other three centers could be worth 25% to 50% more without the fourth center in the picture. If you don’t know what growth percentage to put on there, you’re unable to capture the true value.
“From a buyer standpoint, they can’t see which center is producing what, and they’re going to put a very conservative estimate on the value,” Rush says. “The more detailed, organized and clear your financials are, the easier it is for the buyer to see the value in your urgent care business.”
The urgent care industry is currently in the fast-growth stage of its life cycle, and more people will enter the market as the industry matures. However, people entering the market now want centers that they can invest in.
“There’s no turnaround guys in the market right now,” Rush says. “Buyers don’t want a ‘fixer-upper.’ They don’t want to have to roll up their sleeves and put staff from corporate in.”
Rush says that if buyers find out that a main physician at a center is going to retire or quit working after a sale, that scares them.
“If it’s a small town that is familiar with that physician, and they leave, now the buyer will have to go recruit a new physician or rebrand the center,” Rush says.
To keep a buyer interested, Rush says it’s important to let them know that your staff won’t change once the transaction is closed.
“Show the buyer your provider list, and communicate to them that it’s not going to change,” Rush says.
In addition, if you’re a practicing physician owner, buyers will be more interested in your center if you continue to practice after the sale.
“You center is worth significantly more if you plan to continue practicing,” Rush says. “Buyers want to retain the key people within the urgent care business and center. They want the operators, the physicians, the physician owners, etc.”
If your center offers multiple services, it can be hard for buyers to see which services are generating the most revenue for your clinic. Some buyers only want to acquire pure-play urgent care centers, but if you can show them the value of your extra services, they may be willing to take a closer look at your center.
Having your operational data organized and easy to understand will help you during the transaction process.
“If your center offers five services and sees 80 patients a day, are you seeing 80 urgent care patients? Or are you only seeing 50 urgent care patients and doing 30 sports physicals?” Rush asks. “Whenever you don’t have that information broken down per line, per center, buyers can’t get to that info very quickly.”
Buyers that have to decipher your financial data will be less inclined to buy.
“The whole point is to make your business as attractive and easy to understand as possible,” Rush says. “Buyers should be able to review some cursory information quickly and know in 15 minutes if they want to invest the time and effort to take a deep dive, or not.”
If your center’s operational and financial data is a mess, then buyers will look for other opportunities.
“We’re in that type of market right now where the opportunities are plentiful, so buyers are unwilling to take the time to dig deep to see your value,” Rush says. “If a buyer can’t see your value right off the bat, that’s a bad thing. Having clear information that says what your business is doing in conjunction with the financial data will help buyers see the value in your center and your services upfront.”
If you’re planning on putting your business up for sale in the next year or two, Rush recommends having someone come in and do an audit. Audits can reveal if you’re not coding and billing as aggressively as you could, or should, be.
“There could be codes that you could rightfully bill, and collect on, but didn’t,” Rush says. “If you don’t catch that before going to market, you could be leaving a significant amount of money on the table.”
Even if a seller already has an in-house coder or a billing company, it’s good to have another set of eyes come in and look at your billing and coding processes.
“On the positive end, they can confirm that you’re doing everything right,” Rush says. “They can also let you know if you’re doing something wrong and just haven’t recognized it yet.”
The earlier that you can catch any problems, the better off you are. By addressing any coding or billing problems before going to market, sellers can show a higher profit for their center and negotiate a higher sales price.
Many of these solutions prompt sellers to be proactive, instead of reactive. By following the solutions listed here, and the ones published last week, before going to market, sellers can increase their chances of a successful transaction at the highest sales price, multiples and terms.
To learn more about how to prepare your urgent care business for sale, join our complementary webinar on February 27, 2015: Preparing to sell your Urgent Care Business for its maximum price and terms in 2015 or 2016
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