Improving Value Before the Sale
Increasing a business’ value prior to a sale is a bold move that can increase purchase price and leave the seller walking away with more cash than originally planned. However, this is easier said than done, and The Ambulatory M&A Advisor examines some of the ways to approach increasing the value of a business before the sale.
Lee Ferber, CPA, Partner with Gettry Marcus CPA P.C. says it is never too late to improve business value and there is no set time. It is a continuous process and if the goal is to increase value, improvement should be made on an ongoing basis; this goes for any business and especially healthcare.
Ken Conner, Shareholder, CPA with Elliott, Davis, Decosimo says that as far as when to begin focusing on business increase, h would assume that generally an owner is always trying to improve. However, when first considering a sale the owner might asks for an independent assessment and a second opinion before any major capital expenditure or expansion
Conner says the business owner needs to understand where the particular niche is relative to what is ‘hot’ in the market and what regulatory or market risks loom on the horizon before deciding which direction to head in while focusing on increased value.
When discussing the possible steps that can be taken to help improve value before the sale, Conner tells clients whatever they would do to improve their business results in the short-run, they should be doing to prepare for a sale.
This includes steps towards a workforce reduction, renegotiating a contract at more favorable terms and at the top of the list, clearing up accounts receivable and improve collections. Conner stresses that focusing on historical performance is critical to determining the direction of where to focus on increases in value.
“Historical performance is critical – it is the baseline performance that attracts interest and sets the first impression for price. Other items may drive price, market position, geographic location, quality facility, existing contracts but if you have all of these and mediocre performance, the entity is behind the curve,” Conner says.
“Review staffing, do your assessment of what is not working (billing, patient through put), improve the cleanliness and appearance, renew or extend or renew key contacts, identity any personal expenses in the business that would not continue under a sale.”
Lucas Hutchison, Senior Consultant with Pinnacle Healthcare Consulting says that there are a few main things to keep in mind when thinking of increasing business value, especially for the long-term.
According to Hutchison ensuring that demand for service or product is important, depending on the type of business that is aiming for increased value.
“For healthcare, physicians need to be looking at what sort of different types of services that physicians can offer and modify. They also need to be keeping an eye on what sort of services may be in the future or provided by another type of provider. They need to be aware of what other sort of competition there may be for service providers,” Hutchison says.
Hutchison states that when examining the possibility of an increase in value finances are something that need to be taken into account.
“You want to become a dynamic business that pays attention to other opportunities. This includes opportunities to expand, diversify, enter other markets,” Hutchison says, adding that those are moves that a business owner wants to be paying attention to as your business is maturing and increasing value before deciding to sell.
“As the business grows in maturity and increases in value, what you want to be paying attention to is making sure that your business is sound and will be for a long time, especially when you are considering participation in an acquisition.”
Hutchison explains that when faced with the desire to increase business value before the sale, no matter what the method is of increasing that value, the goal should be to use the plan to set one’s business up to be in a position to be acquired. He says that a business that is financially healthy and has shown growth prospects, are an obvious choice for prospective buyers seeking an acquisition.
Ferber says that the steps to improve value include numerous steps, however, everything depends on the size of the business, especially in terms of the number of employees who can participate in the process of making change and ultimately increasing the value of the healthcare business.
“In terms of steps, a few of my thoughts are developing a strong management team, having appropriate leadership, making appropriate investments in technology. We all see today in this digital world, especially with healthcare investments in technology are essential to automate processes not just on the clinical side, but also the reporting side. This is whether it is practice management reporting, reporting in the accounting department, finance department, billing department,” Ferber says.
Ferber adds that business owners also need to develop a strategic plan. By doing that there should always be a focus on always addressing the key issues that are impending a business’ ability to achieve growth, achieve its goals. To him, this is a critical aspect to any business, and certainly in the healthcare business.
“Just to go a little deeper into a strategic plan, it is improving the processes and operational efficiencies of the business, healthcare practice, surgery center or urgent care operation. It is about focusing on marketing and maybe sales. In terms of the marketing strategies, there are some additional steps. You also need to get your legal house in order. That could mean you make sure that you have employment agreements in place for key employees, contracts with payors. These are the things that can come back to bite you when you are looking to sell your healthcare practice. You could find out that the potential acquirer is not comfortable with some of the legal arrangements because they are not properly documented. Getting the financial house in order and building a strong financial and accounting team is important. You have to be able to present profitability the right way to a prospective acquirer,” Ferber says.
“A prospective buyer would like to understand where the profit is or the losses are in the real costs. In t0day’s world we see a lot of Management Service Organizations as a way for all types of medical entities to develop spin off MSOs for succession planning, estate planning, and the eventual sale of the business some time down the road.”
Ferber adds that another way to excel is to perform an acquisition to improve value.
“From the urgent care side, we have had a number of urgent care transactions over the last year. The key with urgent care is, as long as it is done the right way, its size matters. In urgent care, where it is very dependent on location and competition in the area, you find a good site, you vet it out. If it has the significant growth that you expected, that is going to drop significant dollars to the bottom line, and irrespective of the multiples that is going to increase value. Whether it is a medical practice expanding to different specialties, urgent cares opening up additional locations, any type of ancillary providers etc. If you have a good name, a good brand, and a good reputation in the medical community, then size does matter when it comes to value as long as the practices that you acquire are ultimately profitable,” Ferber says.
Conner says that although increasing value may seem like an obvious improvement before a sale, a really well run business may have trouble making dramatic improvement in value while an average performing business has opportunity but do they have the management talent or resources. Also, even with room and ability to improve in the hot niche it may be time to sell and let the buyer pay for the upside potential.
Ferber agrees with Conner and adds that the key to improving value without spending a lot of money is getting a management team truly engaged.
“If you have a strong management team, they can address a lot of the key issues and can implement change without hiring a wide array of outside consultants. However, money does have to be spent; financial investments are necessary in any business, certainly in modern healthcare. One of the things that I recommend is to use a financial firm to act as a facilitator for the business. This can help the healthcare business or management team that has a vision for the business but may not have accomplished all it would have liked to alone. A facilitator could help develop a true strategic plan that is long-term, has action items, accountability assigned to those involved. This will get everyone on the same page, and the facilitator, an objective person, can help get the team engaged or find out why the team is not engaged. That is certainly a way to properly spend your money to get your management team truly working together and staying engaged,” he 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.