Thinking About Selling Your Healthcare Business?
February 2, 2023
5 Things You Need to Know to Prepare for a Transaction
“We should remember that good fortune often happens when opportunity meets with preparation”.
-Thomas Edison
Markets shift constantly. If we only knew where the market would be at a given point in the future, we could time our transactions accordingly. Even the most educated and experienced economists are often wrong in predicting markets. Focusing on what you can control is key to a successful M&A healthcare transaction. Since healthcare is considered non-cyclical and therefore not widely affected by the state of the economy, there are always buyers searching for healthcare M&A deals. Let’s examine what you need to know to prepare your home healthcare or healthcare service business for sale.
- Determine your motivation.
Motivation is personal and varies for each business owner. It could be a desire to take some chips off the table to pursue other endeavors, retirement, health issues, family matters, a loss of passion for the business, or a myriad of other reasons. It’s important to have a clear motivation as well as a plan for what you will do after the transition. The motivation to sell must outweigh the desire to continue owning all the equity in the business. Of course, price will be an important factor, however, without a clear motivation, the question of, “how much is enough” with the answer of “just a little bit more” can hinder negotiations and prevent deals from closing.
- Organize your financials and paperwork.
Financial statements are the basis for assessing the price and terms a buyer is willing to commit. Having clean, consistent, verified, and detailed profit and loss statements and balance sheets is imperative to a successful transaction. Other important items include KPIs (Key Performance Indicators), regulatory paperwork, corporate filings, contracts, insurance policies, and policies and procedures. Having this information stored in digital files will save time as you progress through the process. A.A. Milne, one of my favorite children’s authors and the creator of Winnie the Pooh, once wrote “Organizing is something you do before you do something, so that when you do it, it is not all mixed up”. Organizing will save you time during the process so you can continue to focus on running the business until and throughout the closing.
- Employ a transaction team.
Getting good advice is paramount to a successful outcome. Proverbs 11:14 says “Where no counsel is, the people fall: but in the multitude of counselors there is safety”. Select advisors with care and provide clear direction for their intended scope of work. A healthcare M&A transaction team typically consists of a broker, an attorney, and an accountant/ tax professional.
Broker. The primary role of the broker is to confidentially market the business and assist in negotiating the price and terms of the transaction. An experienced, principled broker will provide realistic expectations for expected selling price and be able to guide you through every step of the process while orchestrating the transaction team. A reputable broker will typically insist on an exclusive contract so as not to put themselves in direct competition with you, the seller. Read the fine print in the listing agreement. Some brokers will overvalue the company just to get you to sign an agreement that ties you in to every contact in their data base for years whether they effect the deal or not. They may promise you a shorter term or an easy out of the contract even though you could end up owing them a commission years after the expiration of the contract even if they weren’t the procuring cause of the transaction and the buyer was never formally introduced to the business. Ask for references and call them.
Attorney. The ultimate role of the attorney in the transaction is to protect your interests in the purchase agreement and related closing documents. It’s important to use an attorney who specializes in M&A healthcare transactions. A good transaction attorney will help you get a deal completed while shielding you from unnecessary legal exposure. Both the buyer and seller will have attorney representation so it’s important that at least one side understands healthcare law specific to your state and industry. A skilled, experienced M&A healthcare attorney may have a higher hourly rate but in the long run they may bill fewer hours since you won’t be responsible for the attorney to educate themselves about M&A and healthcare law.
Accountant/Tax expert. Your accountant may be needed to help explain any nuances in the financial statements. Companies that receive payments from Medicare, Medicaid, other 3rd party payors, or have capitated contracts, often have more complex revenue recognition processes that are best explained by the accountant familiar with the business. Tax advice will be important in the structuring of the transaction and helping you understand how much you will walk away with post transaction. In a complicated deal structure, you may need to consult with both your regular business accountant a business tax specialist.
- Communicate clearly what is important to you in a transaction.
It is a given that the price and terms of the transaction are important but there are other things that may be important to you. What is your desired role post transaction? Do you want the goals of the buyer to be aligned with your vision for the company? Are you concerned about what happens to your staff and key employees after the transaction? Is your timeline immediate or can you take time in the process?
Winston Churchill once said, “If you have an important point to make, don’t try to be subtle or clever. Use a pile driver. Hit the point once. Then come back and hit it again. Then hit it a third time- a tremendous whack”. Clearly and concisely communicating to your advisors what is most important will help you achieve your goals.
- Keep your focus on the company’s growth, earnings, and staff morale.
Once you’ve made the decision to exit or recapitalize, it is too easy to get so wrapped up in the process that you become distracted. To maximize the price you receive and the value the buyer receives, it is critical to continue to maintain and preferably grow earnings while nurturing staff morale throughout the acquisition. Buyers will want to review monthly financial statements during due diligence and have the most recent statements prior to closing. They will want to feel confident that staff will transition to the new ownership. Any negative material changes could delay the deal, affect the purchase price or, in the worst case, stop the deal from moving forward to closing. Keep things running smoothly so the acquirer can step into a turnkey operation.
Being prepared, having a plan, and executing that plan are what made you successful in business. The same preparation, planning and execution will assure success in selling your healthcare business.
Beth DaSilva is an M&A broker with over 20 years’ experience specializing in healthcare transactions.