Designing the Road Map for Your Transaction
A first time transaction is an important step on the journey of the successful healthcare business owner. Planning a road map from the idea of the transaction up until the contract is signed is something that every potential seller needs to think about. The Ambulatory M&A Advisor brings to its readers some advice on planning the roadmap to the sale.
The First Steps
Todd Laz, CEO of GoHealth Urgent Care has participated in several healthcare M&A transactions throughout his career. According to Latz, when taking the first step of planning a transaction, the clear first step is to openly and honestly consider what they, as a potential seller are seeking to achieve – is it a growth capital raise, a personal liquidity event, a strategic partnership opportunity – and what impact will it have on your current operations.
“Once you have articulated the rationale for the transaction, the next step is to consider the current market: how will it affect what you are seeking to achieve? Are you ready for this transaction, or are you attempting to be opportunistic given evolving market conditions? You should also identify the external resources you will need to achieve your goals on an appropriate timeline,” Latz says.
Mark A. Cunningham, shareholder, Chair of the Health Section for Chambliss, Bahner, and Stophel P.C. says as an initial point, he believes it is critical to understand first who the potential buyers out there are, and what the end goals are for the type of business in question.
The owner needs to decide what they want out of a buyer. Do they want buyer looking at the company from the standpoint of taking over operations on a long-term investment, or instead, one that looks at the business with the goal of reselling it in a three to five year time frame?
“In either case, there will be similar important areas that will be common. How strong are the finances? What are fundamental risk areas in the seller’s industry and how have they prepared themselves for those risks? To what extent is the seller staffed appropriately to respond to current market forces?” Cunningham asks.
“However, if one is looking toward a long-term investment, the quality of the existing staff and the historical relationships with that staff may be a more important factor. Furthermore, the extent to which the buyer believes that it can come in and make changes or significantly supplement management are other considerations that need to be explored. Fundamentally, I think the first step is understanding what your potential buyer may want out of the transaction. After you do that, then you can look to common areas within the potential seller’s operations and align those with the buyer’s goals.”
Latz says that preparing to sell a business means that they know when they are prepared to sell it.
“There are certainly stages in the lifecycle of your business when spending a material amount of time considering and preparing for a potential transaction will not make sense. With that said, I would recommend continually thinking about the future and what type of transaction might best help you achieve your goals, even if that is merely in broad terms. Having a “road map” will allow you to move more quickly if an opportunity presents itself or if industry and environmental factors create fertile ground for a transaction when you were least expecting it. Once initiated, transactional processes tend to take on a life of their own and create significant momentum, so you will always be better off if you are prepared,” Latz says.
Best Practices for Preparing a Transaction
Michael J. Reilly, CPA/ABV, CVA, partner in charge of the tax and valuation departments at Dannible and McKee, LLP says financial records are extremely important when planning to sell a healthcare business. It is important that a business like urgent care has good financial records going into a sale, increasing buyer confidence and decreasing due diligence foot work.
“A lot of times there are year-end adjustment postings, and a lot of times those don’t get made in the records; those get made through an outside accountant and they don’t filter through to the accounting records. Sometimes the accounting records don’t match up with what the outside accounts do. For example, you might have internal financial statements and the accountant does tax returns. The accountant does the tax returns and makes certain adjustments and now the tax returns don’t agree with your internal records. It is really important to make sure that your financial records tie out with your tax returns so that they are all posted and everything is completed on a timely basis,” Reilly says.
“The other part of financial records is that you want them to be consistent. Generally, when the buyer is looking at a practice, they are looking at not just the most recent year, but they are going to go back three to five years. If they see a lot of inconsistencies, it could be due to sloppy accounting and record keeping. It makes them a little bit nervous.”
Latz says that aside from clean financial records, successful transactions can be done a myriad of ways, but there are a few important constants.
Latz explains that open and transparent communication between buyer and seller is a must.
“There are times when this can be done between respective advisors, and others when this should be done principal to principal. Also, thorough preparation before embarking on the process: you cannot always be as prepared as you would like to be (for example, when market dynamics require quick action and opportunism), but the more prepared you are before the process starts, the more deal certainty you will achieve,” Latz says.
Latz adds that the highest price is not always the “best” price.
“You need to consider what is most important to you in the transaction: price, continuity or continued involvement/investment, etc. Be clear in your own mind from the beginning about what you are willing to compromise on and alternatively what is non-negotiable. If you cannot find common ground with the other side on those key points, you are better served to quickly move on to other alternatives,” he says.
Cunningham explains that understanding the future of the company post-transaction is critical, both as it relates to the internal operations of the company and the external market forces in play.
“First, it becomes imperative to understand the current state of the seller’s internal management and financial structure to see whether or not they, if the market were to stay constant, need any material changes which can be implemented post-closing and whether such changes would be achievable. Furthermore, having a good understanding of the external market forces is critical. To what extent is the company in a market which is posed to expand or contract?,” Cunningham says, adding that in the healthcare industry there are some past and current issues that owners usually tend to forget, but could be considered important to the buyer.
Cunningham says compliance can be a fundamental issue that, for whatever reason, is viewed as a redheaded stepchild by owners when operating the company, but becomes one of the most toxic issues to a sales process. He says fundamentally, an owner that is wanting to sell its company must have internal personnel that is familiar with the industry there and can competently and assuredly provide answers to a buyer on key compliance issues.
Latz says that when examining errors that can be made, there can be numerous pitfalls in preparing for a strategic transaction, including underestimating the amount of internal effort, resources and time that will be required – transactions can be costly, especially if they are not ultimately consummated.
Latz says another area of concern is misalignment of incentives with strategic advisors (bankers, M&A advisors, legal counsel, etc.), and not taking sufficient time to fully understand the detailed dynamics of your own business.
“You should assume that multiple parties will be taking a hard look at everything you do during the diligence phase and you should understand your own challenges and get in front of them from the beginning, rather than learning about them from third parties,” Latz says.
Top Questions to Ask Prior to the Transaction
Latz says that when considering a transaction, questions need to be asked, not only of the potential buyers but of the advisors beings selected on both the buy and sell sides of the equation.
“Understand your prospective advisors’ experience, both within and beyond your particular industry or service line, and their approach/style,” Latz says adding to make certain that they understand the business’ strategic objectives, resource capacity (how much will the business seek to do internally versus reliance on the advisor) and limits (whether they be financial or other terms).
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.