Hunting Out the Profits in your Urgent Care Business
Recently, The Ambulatory M&A Advisor covered a webinar presentation on when and how to sell your urgent care business presented by Blayne Rush, investment banker, President of Ambulatory Alliances, and Scott Witter, Director of Business Development for U.S. Healthworks. The last article focused on valuing and maximizing the value of an urgent care business. Continuing with the theme of making your UCB look as profitable as possible to a buyer, Rush and Witter discuss the ideas of synergies and the importance of the due diligence process in a transaction.
According to Rush, synergies are cost savings and revenue enhancement that are achieved with business combinations.
Rush explains that these values are not presented on the financial statement, but one could accomplish the values by recasting and negotiating the allowed synergies, because some synergies are not allowed.
“For example, say that you are selling to a hospital and this one particular hospital has contracts that pay significantly higher than anyone else. So, it’s not common across the board. It’s not say three or four hospitals have these types of contracts, only them. You can’t capture that synergy value. That’s potentially considered a kickback. You would look at those types of things and argue those,” Rush says.
Witter says that although synergies can certainly be more debatable, it is, in his opinion, fine to point them out in a transaction. According to Witter, there is a debate in terms of who should benefit from the synergies, but it’s a negotiation piece and opportunity to present upside and growth opportunities to a potential buyer.
“I see absolutely no harm in doing that but keep expectations in check. Somebody might not fully value it. Somebody might just say, “Ok. We will work that in.” But kind of slip the value and things like that because it’s really us that are able to bring those savings to the table,” Witter says.
Rush adds that in smaller transactions, it’s much tougher to argue and reach an agreement.
“However, if you have three or four large buyers talking to you and wanting to make offers, then you have a chance to at least leverage some of that. They might not give you all of that but if you’re really highly sought after, and that’s why we want more buyers into the marketplace, then you should be able to capture at least some of those synergies,” Rush says.
Witter says that one other fact to point out regarding synergies is often the adjustments can go the opposite direction and you need to be wary that you might be under-expensing.
“This is a simple way to understand this,” Rush says. “ If you say rent is 5 dollars, you’ve got to be prepared to live with that if you own the real estate going forward. If you say “Hey my salary is 100,000 dollars, I’ve got all of this profitability, pay me on this profitability.” Well, you’ve got to live with that 100,000 dollar salary going forward. Meaning if they are going to sign you up a contract to stay on, then you are going to be getting 100,000 dollars. Don’t be crying on both sides of the fence.”
The next big piece of a transaction that brings buyers to a price point is the conducting of due diligence.
“The big point is the due diligence process is very exhausting. Large corporations like private equity groups, hospitals, are beholding to armies of accountants, auditors and legal teams. We have to really cover our bases and ask for everything under the sun. In the end we end up getting a massive due diligence list,” Witter says.
Some of the main items asked for in due diligence include: general corporate material, financial information, operations, competition, marketing and sales, physician relationships, agreements/contracts with payor, vendor, client, staffing, equipment, insurance, real property, regulatory and licenses, legal and compliance, joint ventures and partnerships.
“You look at it and go “You guys are crazy, I could never pull all of this information together!” That’s the time to take a deep breath, sit down with the buyer and say “Okay, what are the more important pieces, how can we bulk pull a whole litany of financial information,” Witter says.
According to Witter, 98 percent of due diligence might be able to be handled by the buyer by giving the buyer your master Quick Books file or something along those lines.
Rush agrees that the process of due diligence is, in fact, extremely exhaustive. According to Rush, based on what the seller gives a valuator to go off of, a due diligence process may take anywhere from two and a half months to six months to complete.
“I’ve seen it where someone called me asking what financial statement I wanted. I want the one out of Quick Books but they didn’t use Quick Books. I said “Well, give me your shoebox.” Really that is true because that essentially is what I have ended up with before,” Rush says in an example of a lengthy process. “A lot of the things they are asking for might just be discussion items. A lot of it there is not applicable. I always joke of you know, the oddest question we ask for is outlining and talking about any underground storage tanks on your property. That’s a ridiculous question but it needs to be asked,” Witter jokes.
Rush says that the team conducting the diligence pulls all of the information up front because they want to go through it and organize everything in such a way that it makes it easy on the buyer.
“The easier you make it on the buyer the more they like you. The more someone likes you, the more you are able to show them the value of the company they are going to get. Now the buyer can justify to their bosses, that the company is worth more versus the company is a pile of junk,” Rush says.
Witter says that although the conducting of due diligence is a very exhaustive process, having your advisors help you through the process, guide you through it, having that other key operational person to work with you and collect that information is key.
Not only does the conducting of due diligence help promote the value of your urgent care business, but it can also help you face any post-transaction challenges head on and avoid any post-transnational issues that can escalate quickly.