Tips for a Successful Exit Strategy
When opening an ambulatory healthcare business, going into the venture with an exit strategy is something that valuation and legal advisors say should be considered from day one. An exit strategy can help put you on a plan to ensure that when the time comes to either sell the business to a prospective buyer, or if it is passed on to beneficiaries, that the business is in a successful financial position and the transition is one without arguments or questions.
James Lloyd, principal with PYA believes that as a general rule, preparing for an exit should begin at the time that owner buys the company.
“In other words, what I tell a lot of business owners including surgery centers and healthcare entities is that they should always view their entity as an investment. If you view it as an investment, you should manage it so that it is more valuable when you sell it, than when you bought it. It needs to be something that someone wants to buy at some point when you are ready to step aside and retire,” Lloyd says adding that there are many business owners that do not do this.
“Nobody does this, but you should really do it right away and begin the process of thinking about it. This helps you make better choices as you set up your business, as you have agreements with partners, as you bring others in to the ownership of the business. That will all become important as you are getting to the point of wanting to sell your business,” Vanita Spaulding, managing director with Cogent Valuation says.
Spaulding advises that owners set up initial agreements with the idea that at some point they will want to pass on the business to a beneficiary or sell out right, making the first steps a very important stage when preparing for an exit strategy.
“Agreements work no matter what kind of an exit you are thinking about. It could be just the exit of you as a partner or your partner leaving the business. Or, down the road it could be you and other partners decide you want to sell the business, and others don’t. What happens in that case down the road? You hadn’t thought about it in the beginning, and now it is staring you in the face, and you have a fight,” she says.
Thomas Cuccia, managing director of the valuation and transaction advisory division for Altegra Health says that when to start thinking about an exit strategy really depends on the type of business.
“A physician who opens up a practice take a longer term view. They are viewing the professional practice as a career and may look at a 20 or even 30 year exit strategy, because it is their plan to be in their practice for a long time. A non-professional healthcare business like an urgent care center, tend to have unlimited lives because different doctors will cycle through a surgery center as other doctors want to retire and move on. The interests are generally repurchased from the parting physicians and sold to the new physicians who want to enter the business,” Cuccia says.
Cuccia advises that owners run their business with the end game in mind.
“If the end goal is to exit after ten years, then I think you should start thinking about it from almost the first day that you open,” Cuccia says.
As far as when to assemble a team of advisors to help with the planning process, Cuccia says that two or three years out is when you are going to want to start thinking about getting together a team of advisors.
“The best advisor is going to be someone with experience in selling similar businesses. They will know how to identify the buyers, the best way to present the company to the buyers, and they will also know the best sales process. Identifying an advisor that fits the size and profile of your business is really important,” Cuccia says.
Spaulding says that the best thing to do when starting the business is to have a real plan, and the best way to do that is to have an accountant and an attorney who really understand the pitfalls of operating a business solo or with partners. Spaulding says these individuals can draft the agreements that set up exactly what is supposed to happen in the multitude of eventualities that you could run into down the road.
“If you hire an accountant and attorney who know that you will have an exit strategy, you will be well served,” Spaulding says.
“Five to ten years out, you might want to hire a valuations professional. At some point you may want to hire a valuations professional just to do a very simple analysis of the current indication of value for your business. That will tell you two things. It will give you a sense of what the value is; but a valuation analyst can also tell you what are the things that they see about your business that either increase value or are negatively impacting the value.”
Cuccia agrees with this process and thinks that when an owner gets about 7 years into a 10 year plan that they need to start thinking about the valuation of the business and the steps that can be taken to enhance that value over the next three years.
“If you are in the 7th year of your 10 year plan, then your business is probably running smoothly, but you really want to make sure that it is, and you want to take some steps to enhance value,” Cuccia says.
“You want to start thinking about the use of a valuation advisor so that they can give you ballpark numbers of what the business might be worth. Then, once you get an offer, they can help you evaluate that offer as well.”
Lloyd explains that building the value of the business over time is crucial. He says this is done by trying to maximize the revenue, manage expenses appropriately.
“I think you try to make sure that you are making good business decisions. If you are going to hire someone or are going to invest, there needs to be a good expected return on your investment. What we have seen, even with healthcare entity owners is that they fail to make investments sometimes and that works against them at the time that they try to exit as well. For example, if they never upgrade their equipment or facilities, something is not going to be attractive when they want to exit. Or, if they don’t invest in the right people and hire people that are not going to be able to sustain the business when the owner exits,” Lloyd says.
Spaulding says that an exit strategy is important in the value of the business even five years before the potential exit. She advises owners to look over it at least once a year.
“You may not revise it so much if it seems to be on track. You might want to review it with your team of advisors. At some point down the road you are going to want to bring in your financial advisor to help you understand what kind of money it is really going to take for you to retire,” Spaulding says.
Cuccia says that revising is very important because owners need to take a look at regulations and whether or not they are currently compliant with those regulations.
“We all know healthcare is a very highly regulated business. So, any change in regulation could lead an owner to decide that it might be better to sell now rather than wait until the regulation might have a negative impact on them. If your plan involves selling the business or transferring a portion of the business to family members of the second generation and they decide they are no longer interested, then you are going to need to revise your plan,” Cuccia says.
If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.