Preparation Before the Sale

StoryPreparation before the sale of a healthcare business is imperative to the deal running smoothly, and both parties walking away from the deal with a strong sense of value in the business transaction performed.  The Ambulatory M&A Advisor covers some of the best ways that sellers can prepare for a smooth and profitable journey down the road of a sale.

David D.”Beau” Haynes Jr., partner of the law firm DeBruhl Haynes– The Health Law Group says he believes the most important thing to the smooth sailing of a transaction is planning months ahead before the sale.  Haynes says this move gives both parties plenty of time to conduct their due diligence.

Haynes says planning ahead gives buyers and sellers the appropriate time to address any issues that may pop up.  Where the challenges come up in the healthcare industry is when a buyer or a seller approaches a healthcare transaction lawyer 30-45 days out and wants to try and finish a transaction in that time period.

“I think the most important thing is giving yourself the time to appropriately plan, appropriately conduct due diligence, and making sure that built into that time frame are contingencies for the unknown,” Haynes says.

Haynes says that certain things sellers need to be aware of prior to the sale are any litigation, investigations, licensure or accreditation issues that are disclosed or discovered in the course of due diligence.  This then brings the question of exposure to the buyer after closing and how to address that.

“I think the buyer or seller should start with an attorney, a CPA, and/or some type of business consultant.  Having a meeting early on, when you think you have an interested purchaser is appropriate.  A couple of things that need to go along with that include, when you get into some substantive  discussions, I think you need to always have a confidentiality and non-disclosure agreement, even if you are just having a cup of coffee with a potential buyer.  That just protects all involved,” Haynes says.

The other thing that Haynes says works well is having a non-binding letter of intent early on with a potential purchaser.  He says it helps define the goals of both parties.

“Even though you haven’t designed the transaction in detail, it helps each side, including the seller, identify the main goals of the particular transaction.  It helps both sides of the transaction identify pretty quickly what they want and if it is not going to work, it becomes a protection mechanism where you don’t get down to the one yard line and then both parties realize that they can’t make the deal work,” Haynes says.

Kathryn Hickner, attorney at the law firm of Ulmer and Berne agrees with Haynes and discusses the importance of the organization of corporate documentation prior to the sale.

Hickner says it is important to consider focusing on the organization of corporate documents and contracts and making sure that those are updated before making the decision to place the “For Sale” sign on a business.

“It’s really important to make sure that the corporate documents and contracts are updated before the due diligence process begins.  It makes the process much more efficient.  Buyers will typically request copies of the governance documents and contracts during the due diligence phase, so it’s a good idea to just be prepared for that,” Hickner says.

According to Hickner, these documents include any business plans, Performa’s, articles of incorporation, bylaws, operating agreements, buy/sell agreements etc.

Hickner says having those documents up to date and organized certainly helps move the valuation process along.

Hickner states that first, potential buyers will want to review finances to see how profitable the overall business has been, and what the potential is for profitability in the future.

”It is important for the seller to have reliable financial statements,” she says.

Hickner adds that aside from just having reliable financial statements and prepared documents, there are a few other things that a company can do to set itself up for a higher sales price well in advance of a sale.

For example, a seller might negotiate long-term supply contracts or customer agreements so as to present long-term stability to potential buyers.

In some cases, a seller can achieve this result by signing or renegotiating key contracts.  Although healthcare companies might not be able to negotiate long-term contracts with customers, there may be other opportunities, such as favorable real estate leases.

Chris Vaughan, Senior Associate, HealthCare Appraisers agrees with Hickner and gives some advice on other ways that physician owners can improve their value, while also proving their credibility as a business to the buyer.  Vaughan says that when business owners are contemplating the sale of a healthcare business, be it a physician practice or an ASC, really, it is never too soon to be thinking of ways to improve the business’ value.  Vaughan says that in his experience the businesses that are constantly monitoring their internal operations and taking the necessary steps to improve those operations are the businesses that generally  have a smoother transition period during the sale.

“They generally tend to be much better off in terms of their overall value when the time to sell arises.  I would say the minimum time that a healthcare business should take to improve its value is generally one year before contemplating the sale.  That gives them plenty of time to contemplate the areas where value can be added,” Vaughan says.

Although improvement before the sale may be tempting to an eager seller, Vaughan warns that if a business is contemplating the sale but has never taken the time to consider improvement before that, the window for improving the value becomes much smaller.

Given the diversity of the healthcare industry, Vaughan says there are a lot of different ways that steps can be taken to improve the business prior to a sale.

“One example that we have seen quite a bit involves either physician’s practices or urgent care.  This example involves utilizing mid-level providers within the business.  Mid-level providers generally can do the same procedures as a physician but their salary is generally lower.  This can really improve your bottom line by helping out with that expensive cost, and thus improving the value there,” Vaughan says.

“Some other examples in ASCs include ASCs where higher value tended to be focused on operational efficiency.  That can be done in a variety of ways for an ASC.  One of the big ones is to manage how they use their operating rooms.  We see ASCs that optimize their OR schedule, inventory management, and communication are really able to increase the value significantly.”

Another operational efficiency that can help business like ASCs make transactions run smoothly is taking the time and effort to invest in a good IT infrastructure.

“A good IT infrastructure really allows them to gather, report and draw conclusions from their cost and quality data.  Understanding that data is a really big step in seeing what improvements can be made and how those improvements can increase the value along the line,” Vaughan says.

Vaughan stresses that prior to a sale, one thing that owners need to understand is how the business collects on its accounts receivable.

“ A lot of times, there is a lot of money left on the table because the AR is not being efficiently managed.  Then, proving the collection percentage of the business is also important.  This really can be done with little or no assessment.  A lot of it is really just taking a step back with your business office staff and asking yourself how often the practice follows up with payors on outstanding collections, how many employees are dedicated to those collections efforts, and how much of that money goes to the practice,” Vaughan says, adding that if owners take a step back, get a thorough understanding of the collections process and make sure that their staff is on top of it, that is a great way to enter into a transaction process.

When it comes to making pleasing improvements for a healthcare business, Hickner says that a seller might also consider expanding the service offerings to provide for a more diversified stream of revenue.

She says that if a healthcare company is relying on a small group of providers for its business, this will create more risk for a potential buyer.

“A general review of existing contracts is also helpful.  In some cases, contracts may be outdated and may no longer reflect the seller’s existing relationships.  If the contracts can be “cleaned up” before a sale is being negotiated, this can provide more certainty to buyers.  In the course of this review, sellers can also identify early on whether they will need to ask any third parties for their consent in connection with the sale,” Hickner says.

If you would like to learn more about the concepts covered in this article, want to sell your business or discuss how Ambulatory Alliances, LLC might be able to help you out, contact Blayne Rush, (469)-385-7792, or Blayne@ambulatoryalliances.com.

If you have suggestions for future topics, email Blayne@ambulatoryalliances.com.

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