Risky Business: Reducing Risk to Drive and Maximize Business Value
October 22, 2021
Risky Business: Reducing Risk to Drive and Maximize Business Value
For many business owners, their biggest asset is the business itself. Think back on how you started out. Remember those weeks and months where you didn’t cash your paycheck so you could cover payroll for your employees? And once your business became profitable, you invested those profits to grow the business? When you passed on taking vacations for years until you felt the business was viable in the hands of your trusted employees? Those were challenging times, but you made it through and should be proud of the successful business you built. Since nearly 90% of all business start-ups in the U.S. fail, you are among the elite entrepreneurs whose start-ups turned into thriving, profitable businesses. Even if you aren’t close to retirement or considering a transaction any time soon, the following strategies to address and avoid certain business risks will not only make the company more desirable to an investor but can help you avoid exposure to situations and events that can damage the company.
Today’s buyers are sophisticated. They are flush with cash because they are very careful about how they spend it and will avoid excessive risk whenever possible. I say excessive risk because there is always some risk, occasionally outside of your control. Investors will take risks where they see potential rewards but are generally averse to risks that can and should be avoided. Liability insurance is one way we can limit risk. The insurance doesn’t prevent catastrophes, but it will limit financial exposure to losses. Investors will scrutinize all perceived risks inherent to the business. Limiting exposure to financial losses is paramount to an investor. If they see too much risk in the transaction, they will reduce the price or even walk away. Also, the amount of money that is set aside in a hold-back of the purchase price may be increased or the time the money is held might be extended to cover potential future risk of liability. The hold-back is akin to an insurance policy designed to limit potential financial losses to the buyer.
Regulatory Risk. When I started as a business broker, it seemed like the first steps in diligence always involved analyzing and proving out the financial information. This is still an extremely important step of the process, but I am finding more buyers beginning their due diligence by assessing the regulatory hazards by auditing patient charts, clinician notes, referral relationships and billing and collections procedures. PDGM in Medicare home health has helped reduce some of the risk. However, the type of patients admitted, the relationships with referral sources and the documentation procedures can still create additional risk. This risk can be greatly reduced by having policies and procedures in place to assure compliance with state, federal and insurance company guidelines. Hiring a consulting firm specializing in your industry can help with mock audits to ensure everything is in full compliance. Since licensing and employment laws can vary by state, it is worth hiring an attorney or consulting firm to advise on legal compliance.
Revenue Risk. In every transaction, a buyer will assess the sustainability of the revenue stream. A business getting all its revenue from one pay or referral source or a concentration of revenue from a small number of clients presents more risk than one that has a broad base of payors, referrers and clients. How closely is the revenue tied to the owner of the company? Will all the revenue continue once the owner has moved on? Do customers and referrals come to the business because of the owner? If the owner nurtures all the relationships with the referral sources, the concern would be whether these referrals “stick” once the owner departs. To help ensure the sustainability of revenue, it is helpful to have a broad base of referrers and a healthy mix of profitable pay sources. Create an atmosphere where the business continues its referral stream whether the owner is directly involved or not.
Operational Risk. Operations should be consistent with hard and fast policies and procedures. When I took the healthcare risk management course, a recurring theme was to always follow good policies and procedures and know them like the back of your hand. Keep updated policies and procedures in a secured file with read-only access. Train your employees to learn and abide by them. These exercises can help avoid regulatory issues and lawsuits.
Human Resource Risk. A seasoned management team with dedication to the company who will continue with the agency after a sale is optimal for any buyer and sometimes a requirement to close. Providing a favorable atmosphere where employees feel appreciated reduces turnover and provides more stability. Employee loyalty can also be enhanced by offering competitive wages, retention bonuses and non-compete/non-solicitation agreements. I would never recommend letting employees prematurely know about a potential transaction as it can cause uncertainty. However, I have seen agreements with key employees, signed upon hiring, that require them to stay on for a period if the business is sold with the promise of incentive bonuses. Consult a labor attorney to draft non-compete agreements with key employees so the contracts are enforceable and meet necessary legal requirements.
Competition Risk. The last thing an investor wants to do is write a seven or eight figure check and find themselves competing against the former owner of the business. All buyers will require a non-compete/non-solicitation agreement. The scope and length of these agreements vary. Be prepared to agree to not compete in your current industry for a minimum of three years and within your service area and contiguous counties. Many agreements will require you not to compete in the whole state and some will cover all areas the buyer operates. You will not be able to solicit employees or customers during this period even if it pertains to a different type of business. Consulting in your industry is also likely forbidden in the agreement. The buyers don’t want you to train another agency’s staff to compete against them. Before starting the process of selling your agency, have a clear idea of what you will be doing after the sale. If you can be flexible with the time you stay on, it will attract more buyers. Some will only want you for a transition so be prepared to dive into your next endeavor.
Your efforts on managing current and potential future risks in your business will not only increase the quality of your business today while limiting certain potential financial losses but can also add tremendous value when you are ready to begin the selling process. There is always risk in a transaction but by minimizing risks that are within your control you will increase interest from buyers, drive more offers and increase the value in the sale of the company.
Beth DaSilva, AM&AA, is a seasoned M&A advisor with almost 20 years’ experience in representing sellers in selling their healthcare businesses. With degrees in accounting and business management, she previously worked as a practice manager for physician groups, an administrator of a home health agency, and has specialized certification in healthcare risk management. She brings a unique perspective to deal-making and focuses full-time on assisting sellers to reach their goals in the sale or recapitalization of their business.
Fleetridge Pacific has been assisting the owners of healthcare service companies to successfully sell their companies since 2007.