Understanding the Mistakes That Could Cost You: Leaving Money on the Table in a Transaction

Physician Employment AgreementIn-depth negotiations and fluctuations in purchase price in the sale of a healthcare business are all typical aspects to the process of meeting one goal; that is, to sell the healthcare business at a price both parties can be comfortable with.  However, there are many instances where despite the help of critical advisors in the process, sometimes details can go unnoticed, resulting in the seller leaving thousands of dollars on the table.

Phillip Zhou, CFA, Senior Vice President of Cogent Valuation explains that typically, in order to prevent issues like leaving money on the table after a sale, deals are negotiated between a buyer and seller with the help of valuation professionals.  In this process, a valuation professional can help with the negotiations by providing an opinion of value that can act as a reference point.

Curtis Bernstein, partner with Pinnacle Healthcare Consulting explains that the idea of leaving money on the table is generally an issue whereby the seller is not maximizing value.  This can occur by either not finding the buyer willing to pay the maximum value or not effectively communicating the value to potential buyers (and the buyers’ consultants).

John Hakanson, a Senior Associate at HealthCare Appraisers, says that when a seller works with a valuator, what often costs them money in a deal are the things they fail to mention during the valuation process.

“Most of the time, we are the ones asking the questions throughout the valuation process.  When my team is valuing your practice, it is important to mention successful negotiations with commercial payers that may lead to increased reimbursement. A lot of times, we don’t get that information the first time we go through the process,” Hakanson says.

“It’s usually only after we deliver a draft version, that they mention the potential for increased reimbursement.”

Chip Hutzler, partner for HealthCare Appraisers says another problem area that valuators face come in  situations where frankly, people enter into deals without getting a valuation.  Hutzler says this situation is not ideal because the seller has not only set expectations; they have actually acted on it before they have gotten their ducks in a row.

“What is far more common is that people will sometimes try to assess it by speaking to people down the street, their friends, about a transaction they may have done, and they think they can do a similar transaction.  What they haven’t necessarily vetted out, is whether the two transactions are really comparable.

They are using the market approach thinking that if the house next door sold for “X” their house should sell for that or more because it is bigger.  However, they may not be comparable.  The house next door might have had upgrades that are not readily visible, and so on.There are aspects about valuation that they don’t understand or consider. It’s not always about what the guy next door got paid.”

Hakanson adds that another area where a seller may encounter issues, involves instances where another physician or even a mid-level provider may join their practice in the near future.  Hakanson says it is important to mention that right away.  Valuation is forward looking, so while a valuator will ask a lot of questions pertaining to historical operations, they are only gathering information in order to accurately project what they think is going to happen going forward.

“A lot of times a practice will mention a new physician is joining, but fail to mention when a PA or NPare expected to come on board. That is important information for us that can add value to the practice.  Alternatively, a lot of times we notice, personal expenses, or onetime expenses that aren’t expected going forward are in their expense structure.  It is important for practice’s to point out these expenses, that way we can remove them going forward,” Hakanson says.

Zhou explains that there is a great deal of planning that should be done on the physician owner’s side prior to the start of working with valuators.

“The amount of time to prepare for a sale of a company will depend on the circumstances of the company.  If the owners are preparing to sell their company, they will typically focus on growing revenues and improving profitability, since many transactions are priced on latest twelve months’ EBITDA.  Since the goal is to improve latest twelve months’ EBITDA, this process can take over a year.  In order to prepare for a sale, owners should make sure that they have good recordkeeping and all of their legal filings and licenses are up-to-date.  It is also important to hire a good investment banker or broker to help with the sale of the company,” Zhou says.

Hakanson says when it comes to planning most practices don’t realize the time frame that it takes to perform a valuation.

“Once a physician decides that they want to go about and get the valuation, they need several weeks, sometimes even up to a month, to get all of the necessary data compiled.  Then from there, it’s another two to four weeks for us to complete our analysis,” Hakanson says.

“Before you can even go into negotiations with a potential buyer, you are looking at a month or two before you have the initial number to begin negotiations.  The sooner the better, when it comes to approaching a valuation team to value your business.”

Hutzler confirms that sellers certainly want to plan in terms of being able to identify for the valuator all of the assets that might be in play.

“Just to give an example, if a physician practice has already converted their medical records to electronic, there is probably some value there for the buyer.  Everybody has to think about that before hand or you could be leaving that value on the table,” Hutzler says.

In the situation where the ink has already dried on the deal, and the seller finds mistakes after the fact,  Hutzler says there could be potential for redemption if  in the contract there had been built a safety net into the transaction where sellers say, “Look, if we find anything of material after the transaction, we have the right to adjust it.”  However, Hutzler says most transactions probably don’t have that in there so it would be tough if an issue like that arose and the seller felt they had to make an adjustment after the fact.

Bernstein says that correcting a mistake once the sales process has started and buyers begin the diligence process, is near impossible.

“I was involved in a case once in which the sellers brought in a consultant after the start of the process.  The consultants made a strong argument for a strategic services line that the sellers were supposedly already in the process of developing.  However, there was no explicit proof of this service line and a price was already offered.  The deal ended up blowing up because the sellers had an idea that the business was worth more than originally agreed to and the buyers were convinced that the business was worth the value they derived,” Bernstein 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.





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