Tips Before the Sale: Understanding the Details
Selling a business can be a momentous event for a business owner. How you prepare for the sale, however, can make or break the deal. What does a business owner need to know before putting its business on the market?
Know the Possibilities of Why to Sell
Plattner points out the example where primary care physicians, typically in smaller practices, will agree to sell the practice’s hard assets only-no goodwill-for a relatively small value to hospitals. The physicians then work for the hospitals as employees. Plattner says the benefit to them is that they have the hospitals take over their staff and take over their other expenses, such as lease agreements.
Plattner also discussed a partial sale and other exit strategies. “The historical exit strategy is where you would typically have the founding doctors bring on associate physicians, make them partners, and have a buy in at that point in time. Then, have buy/sell arrangements such that when the founding physicians leave, their stock is purchased by the younger doctors. That would be a partial sale,” Plattner says.
“Sometimes, on a larger scale, a larger organization will purchase 51 percent (or some other percentage) of a surgery center or partial share of an ownership of a medical practice as well. I don’t see that very often. Typically what you see is the sale of a whole entity or its assets and then going to work for that buyer.”
Assemble A Team Wisely
Plattner also says that thinking about the types of advisors chosen to work with at specific times is also important. He believes that sticking to a historical model is good, however, it really depends upon the practice.
“I think for a smaller, primary care group, the cost and expense of having an accountant, legal counsel, and consultants for a very long time before that person is going to be ready to sell is probably going to be cost prohibitive. Whereas, if you have a large group, like an anesthesiology group or radiology group, that has some significant revenue that is probably sellable to an equity firm or another large medical practice, then I think you want to have that team together earlier than latter in the process. This would be more the financial people putting the books and records together to disclose to the third party buyer,” Plattner says.
Kathryn Hickner, attorney at the law firm of Ulmer and Berne adds that it is always good for a healthcare business to have a strong relationship with corporate and regulatory counsel.
“That counsel should be experienced in healthcare matters because the regulatory regime governing healthcare is obviously very different than any other industry. Relationships that are permissible in any other industry aren’t permissible in healthcare. It’s important to work with someone that knows what they are doing,” Hickner says.
Hickner recommends that this is a relationship that is established whether there is going to be a sale or not. She says when a sale is contemplated; it’s definitely a good idea for the seller to consult with their attorney and with their financial advisors regarding different structures and options that are available. She says that sometimes counsel is able to provide guidance to a seller years in advance in order to prepare for the process.
Get the Docs Organized
One other issue that Hickner says is important to consider before deciding to place a “for sale” sign is focusing on the organization of corporate documents and contracts and making sure that those are updated.
“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.
Brad Martorana, a corporate attorney with Jennings, Strouss & Salmon and chair of the firm’s health care industry group, states that, when business owners are preparing to sell, they should be aware that potential buyers will consider past performance when calculating the purchase price.
“First, potential buyers will want to review finances to see how profitable your business has been, and what the potential is for profitability in the future,” states Martorana. ”It is important for the seller to have reliable financial statements.”
Martorana says that there are a few other things that a company can do to set itself up 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.
A seller might also consider expanding the service offerings to provide for a more diversified stream of revenue. 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.
Similarly, for healthcare businesses in which intellectual property is valuable, a seller should confirm that appropriate confidentiality and intellectual property assignments are in place with existing and past employees and independent contractors, and that appropriate registrations, such as patents and service marks, have been filed and are being policed.
Know the Business
The understanding of the personal business and factors like the market, competition, and customers can also help with preparing to sell it with a home run hit.
Hickner says that sometimes brokers can help owners understand these factors by coming in and assessing where the business is as compared to competitors, what it’s really worth, in order to prepare for the due diligence process.
“I think it’s really important to not only compare your business to other competitors, but to also understand your business internally. This includes making sure you have a strong negotiation team for the transaction and ensuring that the negotiation team is philosophically aligned and in close communication with anybody who needs to approve the transaction,” Hickner says.
Lastly, deciding on what to look for in a buyer is what the experts say is one of the most important preparation steps.
“I think it is really important for a seller to understand their own culture, and to ensure that the buyer is a good fit. If the seller leadership plans to stay on after the transaction, it’s really important to make sure that the buyer is a cultural fit. Sometimes there will be a merger that happens, the parties just can’t get along, and it unwinds. If you’re going to make the investment it’s important that you choose the potential suitor wisely,” Hickner says.
Martorana says it is helpful to find a financial or strategic buyer that is familiar with the healthcare industry and reimbursement concerns.
“If the buyer is familiar with the health care industry and understands potential risks, the seller will have a higher degree of success with the transaction and it will be less likely that potential issues will arise before closing,” says Martorana.
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.