5 Red Flags in Urgent Care Center Transactions

This is part 1 of a 2-part series that The Ambulatory M&A Advisor is doing over the Red Flags Buyers don’t like to see in M&A Urgent Care Transactions.

Ambulatory Alliances LLC Blayne Rush

With an increase in M&A Urgent Care Center transactions, it’s important for buyers of urgent care centers (UCCs) to be on the lookout for any flaws that centers may have. Five red flags in urgent care center transactions that stand out to buyers when considering an acquisition are: unsophisticated legal and financial advisors, undesirable locations with low patient volume, regulatory action, cultural disconnects and poor management and staff.

 Unsophisticated Legal Team and Financial Advisors

Kevin Blank, CEO of FastMed Urgent Care, says UCCs with an unsophisticated legal team and poor financial advisors are often not a good purchase.

“You need advisors who are experienced with deals and know what they’re doing,” Blank says. “I’ve learned over time that if advisors aren’t well-versed in the steps and the language of M&A transactions, that can lead to very bad advice to the seller.”

Going through the process of buying and selling an urgent care center can be stressful, and if the seller is backed by a competent legal and financial team, it can help make the transaction smoother.

“There’s a whole series of steps to get a UCC acquired, and to a small center, that can seem overwhelming,” Blank says. “If the advisors aren’t providing the necessary comfort to the seller because they’re unfamiliar with the process, it can make the situation worse.”

Complex corporate structure can also get in the way of a transaction, and do more harm than good, Jake Kashanian, Director of Corporate Strategy for CityMD, says.

“Companies may have legal entities set up that don’t serve a key business purpose, or that restrict the ability for a buyer to extract profits and cash,” Kashanian says. “Having those types of entities in place can prolong and hinder the transaction process.”

 Location

If a clinic has a poorly chosen location, that can also affect the buyer’s decision to acquire it. Paul Dickison, Vice President of Marketing of CareSpot, and Michael Klein, President and CEO of CareSpot, both say that a poor location is a big red flag for them.

“We look to acquire clusters of centers in existing or adjacent markets, so single centers outside of our market would not be attractive to us,” Klein says. “We also like to look at the center’s competition in a particular area.”

“If buyers have to invest in an acquisition, and invest in overtaking their competitors, that’s going to be hard to do,” Dickison says. “It may not be worth the cost.”

In addition to geographic location, low patient volume also contributes to a clinic’s poor location.

“I look at the seller’s current patient volumes and see if those numbers are yielding break-even or better performance,” Kashanian says. “If they aren’t at least breaking even, and there is not a clear path to driving volumes so they are well past the break-even point, it’s probably not an acquisition that a buyer will want to make.”

Poor aesthetics of a center can also lead to an unsuccessful sale.

“Sellers need to make sure that their centers are cleaned up and look presentable,” Blank says. “Some sellers don’t do that, and it definitely hurts them.”

 Regulatory Action

If an urgent care center is involved in any sort of litigation or Department of Justice (DOJ) investigation, that immediately raises a red flag to potential buyers, Blank says.

“Regulatory risks are serious, and a buyer cannot simply contract them away,” Blank says. “I’ve come across a lot of UCCs that don’t necessarily have all of the right compliance activities in place that buyers require, and if that can’t be fixed, the deal often dies.”

“Buyers don’t want clinics that aren’t committed to good outcomes,” Klein says. “They don’t want urgent care centers that have litigation or have a lot of claims out.”

“If a company has ineffective or weak financial reporting systems, it can potentially cause issues with compliance, and make evaluation of the entity’s financial performance less reliable. This would most likely diminish the value to an acquirer,” Kashanian says. “With the technology available now, there’s no reason for a company to have inaccurate or incomplete records. If they do, that will be a red flag.”

Kashanian also advises buyers to look at a center’s billing system.

“Accounts receivable has a short turnaround,” Kashanian says. “Is the center on good terms with the insurance companies? If not, look into why that’s the case.”

 Cultural Disconnect

When people focus on an M&A transaction, they often only look at the financial side of things, Kashanian says. He advises buyers to also look at the company’s values, leadership and culture.

“Incompatible company culture has ruined deals that have otherwise looked financially lucrative on paper,” Kashanian says.

“If the seller’s center is practicing medicine in a way that the buyer doesn’t necessarily agree with, that’s probably not a good acquisition to make,” Blank says. “Buyers have to go beyond the numbers to understand what the center is doing as a medical practice, and if they agree with it or not.”

“After an acquisition takes place, slow integration is a deal breaker for me,” Kashanian says. “If cultures are clashing and we can’t integrate smoothly and quickly, that can wreak havoc on an otherwise remunerative deal.”

 Poor Management and Staff

If a center has a lack of high quality management and staff, that will often be a red flag for a buyer, Blank says.

“Buyers should also pay attention to the seller’s ability to retain employees,” Klein says. “Buyers won’t want a clinic that has a high turnover rate.”

“Buyers like to see urgent care centers maintain some kind of staff continuity, especially during the transaction time,” Dickison says.

If there’s a big difference between a buyer’s current staffing model and the seller’s acquired staffing model, that can be a red flag too, Kashanian says.

“Analysis of a potential target’s staffing structure can be particularly important,” Kashanian says. “It could be the best urgent care center on the planet, but if they’re understaffed or overstaffed, that can have a huge impact on a buyer’s decision to acquire it.”

 

Kashanian says that there will always be some element of risk involved with an M&A transaction. By paying attention to a center’s red flags, buyers can avoid making an acquisition that they may later regret. While some red flags are instant deal breakers, many of them can be fixed.

“Whenever you do a deal, it’s always judged on the terms that are the most important for that particular deal,” Blank says. “If there are red flags, that doesn’t mean that the deal can’t go through. Buyers will need to assess whether or not any of the flaws can be fixed, and if it’s worth the time and resources to fix them.”

To reveal any red flags in a center, both the buyer and seller can perform a due diligence test.

“The due diligence process reveals a lot, and that has allowed buyers to make good decisions,” Dickison says.

“The traditional and nontraditional M&A due diligence processes are tasking on both parties, but they are necessary processes,” Kashanian says.

“Buyers are going to want to go through the time and expense of a thorough due diligence test to ensure that the appropriate information is verified,” Blank says. “It sometimes gets complicated, but when a seller takes the time to do a due diligence test as well and provide that information up front, it shows the buyer that the seller is serious about selling and can help to close a transaction.”

By being aware of these five red flags in urgent care center transactions and how they can affect the transaction process, buyers can make smarter acquisition decisions.

“We’re coming into a year where there’s going to be a lot of M&A activity across the marketplace,” Kashanian says. “Having a firm understanding of how the due diligence process works well in advance can make the transaction smoother, and save time and money for both the buyers and the sellers.”

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