Deal with your Distressed Urgent Care Business
When most businesses open their doors, the thought of it eventually becoming caught up in devastating financial trouble is often the last thing that comes to mind. Recently, The Ambulatory M&A Advisor spoke with professionals in the field whose focus is exactly that of financially troubled or distressed businesses. These industry experts discuss tips for business owners to predict and prevent distress, and what steps to take if they have to sell the company in the end.
Bobby Guy, a partner at the law firm Frost Brown Todd LLC, specializes in distressed M&A throughout the healthcare field.
According to Guy, from 2010 to present year, the market shows that overall Chapter 11 bankruptcies and Real Estate Chapter 11s have lowered by about 60-70%. Guy says that conversely, healthcare has increased in these filings by 38%.
“What the data tells us is that the US market is doing better in general, and that financial distress for companies is falling. However, financial distress for the health industry is climbing. So you’ve seen healthcare decouple from the rest of the economy. Distress in that industry is going in the opposite direction of distress in the overall market,” Guy says.
Guy says that the definition of a distressed company is a company that faces financial events and contingencies that have a reasonable likelihood of causing that company to fail.
“The biggest killer of companies that should succeed tends to be denial and delay. Early proactive intervention is the most likely way to take a company that is struggling from distress to success,” Guy says.
He adds that it’s easy for a business to say ‘well, that event won’t come true…it’ll be ok.’ Then, when the event occurs, the business is in a complete scramble.
Guy says that in an ASC, for example, issues like an abundance of litigation picking up against the center, DOJ investigations related to the center, or significant reimbursement pressures that cause the center to have a significant problem meeting monthly obligations to vendors, suppliers, landlord, and partners. These are all problems that could lead to the distress of the company.
“As you look at these events, the key is, that the earlier you intervene and begin contingency planning to come up with multiple ways to solve the problem, the more likely you are to succeed,” Guy says.
Guy warns that many businesses get caught off-guard when financial distress arises; mainly because there are a number of factors that can cause this.
“Sometimes it can be a quick change in the market. Other times it can be a lack of internal accounting
controls where they are able to see that they are declining. A third can be a lack of strategy where they fail to see that their strategy is not working. And, a fourth, especially in the ASC context, one bad apple on staff who creates a host of malpractice or liability problems for the facility,” Guy says.
Thomas Califano, Partner at law firm DLA Piper, Vice Chair of the restructuring group says that a company should be able to foresee when they are about to face distress.
“If you don’t know you’re in distress that’s a problem,” Califano says. “People sometimes don’t want to face the extent and level of distress. They always think that there is going to be some magic bullet that is going to make the problems go away, that very very rarely happens.”
Califano says businesses looking to sell their distressed center must be very careful because sometimes Officers and Directors will put themselves in a position where by ignoring the problem for a period of time, the problem has become much greater.
“They keep trying to roll the dice on some sort of risky or low level probability event to avoid the distress. That happens all of the time and it usually deteriorates value,” Califano says.
Liquidity is the best way for a company to retain options, Califano says.
“The more liquidity you have, the more options you have.” He says he has seen a number of companies that could have reorganized, but were forced to liquidate because they didn’t preserve their liquidity and didn’t take steps to deal with things until it was too late.
“Don’t wait until you are up against a fiscal cliff. Prepare a professional book to help solicit authors on the assets by a good healthcare facility broker or a good investment banker. Prepare your records to be able to answer due diligence questions quickly and effectively,” Guy says.
Guy stresses preparation to avoid distress by emphasizing that every company wants to be ahead of their lender and work with them in order to avoid severe complications.
“Business owners are much less likely to recognize the warning signs than their lenders in many cases. Instead of fighting the lenders on issues when the lender starts to see stress, often the company ought to view it as constructive criticism and consider whether this creates an opportunity to work its way out of distress before it gets worse,” Guy says.
Guy adds that a good practice for companies that hold covenant-light loans is to calculate for themselves what the covenants would be in a covenant-heavy loan on a monthly basis. This process will help owners determine how the company is really holding up.
“It’s a very good thing for companies to run debt service coverage ratios, fixed charges coverage ratios and other standard lender covenants for their own benefit, even when their lenders don’t require it,” Guy says.
Chris Bishop, Senior VP, Acquisitions & Development with Blue Chip Surgical Partners says that often times, centers are owned and managed by doctors with full-time clinical practices making it difficult for them to find the time to turn their distressed business around.
Bishop says depending on the situation, if the physician has a corporate partner and they see their business spiral down, they may need a change at that corporate partner level. Oftentimes it is beneficial to bring in a partner that specializes in distressed assets.
Bishop adds that most of the businesses in need of restructuring due to distress were successful at one point. He says that it’s easy over time, to allow for staffing costs and supply costs to maneuver higher if not constantly benchmarking their operation
“One day you look up and find these two categories represent 70% of your revenue, when in reality, they should probably total 40%-45%. Therein, lies your profit,” Bishop says.
“Depending on the level of distress, sometimes the only thing that you can do is blow it up and start over…It’s very hard to recruit new doctors to a business that is losing money,” Bishop says, recalling that the majority of acquisitions he has worked on typically required almost a complete restart.
Bishop says there are certain companies that have a great experience of taking a bad business and creating a strong, profitable business.
“I suggest seeking out those companies who focus on the turnarounds and have a minimum of 5-10 successful turnarounds that they can point to you for reference,” Bishop says.
Over the past decade, Bishop has completed 15 acquisitions of underperforming surgery centers, all of which are profitable centers today because of the development/operational expertise that his team brings.
In the event that your UCC or ASC must be sold, Califano gives advice on the most beneficial route to take should the need arise. Califano says if the company is in bankruptcy court, the best course of action is the Section 363 Sale Process.
“It has really become, in most jurisdictions, the quickest, and most efficient way to sell a distressed business,” Califano says.
Califano says that there a few steps a company must take to follow through with the process.
“The company will market itself. It will choose what is known as a Stalking Horse. A Stalking Horse is a buyer who comes in and makes the initial price. You’ll negotiate an active purchase agreement and the like with that buyer. That sale will contemplate a subsequent bankruptcy filing, and a process by which the company will then be a Chapter 11 debtor, will solicit higher and better sales,” Califano says.
According to Califano, the business will then need to run a marketing process, usually in a focused, compressed period of time. This is followed by an auction where other bidders will try to top the Stalking Horse bid. After the auction, the business receives court approval and the sale is final, he says.
Califano says that the benefit of acquired assets in this scenario to the buyer is that assets are sold free and clear of creditor claims.
Califano says the risks to the buyer are higher if there is no bankruptcy court order involved in the sale.
“You’re at risk if there is not a bankruptcy court order cleansing the assets as free and clear. You’re taking on some risk as a buyer,” he says.
Califano says there are other ways to sell an asset free and clear.
“You can do a UCC sale, assignment for the benefit of creditors, but really, the one that gives the most comfort to buyers is the Chapter 11 363 Sales Process,” he says.
Although it may be disheartening to have to sell your center due to financial problems, Califano says there are benefits involved for the seller.
“There is a benefit to the board, because the board has duty to maximize results of creditors in a distressed situation. The board will get the finding from the court that the sales process is fair and reasonable and that the debtor acted in good faith. That’s essential to a bankruptcy sale process,” Califano says.
He says this move will give the board protection and maximize the value of the center.
“For sellers, it gives them some comfort that they’ve reduced any potential D&O liability. That’s just an example of one of the benefits,” Califano says.
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