There's the expression, "You never get a second chance to make a first impression." For many healthcare business owners thinking about selling their company, the first impression they may personally make on prospective buyers will come from a confidential information memorandum (CIM). If that CIM doesn't represent the business in a professional, positive, and transparent manner, the owner may not get a chance to receive a fair offer.
What exactly is a CIM? It's the confidential document used to market a healthcare business to potential buyers. It may go by other names, including a pitch deck, investor deck, the "book," or confidential information presentation (CIP). The marketing document is typically called a CIM when used in the sale of a mature healthcare businesses and a pitch deck for healthcare startups.
While the name is interchangeable, the content is not. A CIM is the initial source of data and information a buyer uses to evaluate the candidacy of an investment target relative to its investment thesis. Broadly speaking, the CIM explains what the business does and the type of transaction the owners are seeking.
Most business owners do not create a CIM until they are prepared to actively market their business for a sale. However, if an unsolicited buyer takes interest in your company, immediate signals are sent if you do not have a CIM, let alone one that's current: You're unprepared for a sale, and the buyer is in a good position to negotiate a value deal. At least those are the signals potential buyers receive, regardless of whether they're true. Simply responding to interested buyers with an annually updated CIM signals a posture toward prospective buyers that you are not interested in a low-ball offer.
On the other hand, if you intend to execute a coordinated, professional healthcare M&A process to sell your business, a CIM is required. You will be marketing your business to dozens — if not hundreds — of potential buyers, many of whom analyze numerous potential acquisitions each week. Without the data about your healthcare business consolidated in a professional manner, buyers are much less likely to invest the time into understanding your company's raw information. Note: Marketing your healthcare company is essential to finding the right buyer and securing a fair price for your business, which I previously discussed in this column.
Moreover, organizing and presenting the data allows you to structure the narrative in ways that emphasize your company's strengths while providing explanation on any potential weaknesses. You can tell your story to potential buyers in ways that benefit you as opposed to allowing a buyer to "discover" the hair — the operational, legal, financial, or other aspects of the business that have had errors, inefficiencies, or other liabilities — and speculating on any other skeletons that could be in your closet.
This column takes a closer look at the importance and development of a CIM is written for two audiences: 1) sellers who are hiring a professional healthcare M&A advisor, like VERTESS, to help them proceed with a sale and develop a supporting CIM or to double check that their current advisor included the relevant, key points in the CIM and 2) owners who endeavor to manage the sale of their business without a professional M&A advisor (not advisable) and therefore need tips and best practices to create an impactful CIM.
Confidential Information Memorandum Best Practices
Let's take a look at a few general CIM best practices before we discuss key components of a well-rounded CIM.
First, do not use a Word or similar document to create your CIM. Nobody wants to open up a CIM and be greeted by a wall of text — even a wall that has an occasional chart or image dropped in. Buyers review hundreds of CIMs, so the last thing you want to do is have a CIM that makes a negative first impression (remember what I said in the first paragraph). Make your CIM simple, nice to look at, and easy to review and digest. Include graphics, charts, and pictures, and present them in an attractive layout. This is best achieved using software like Microsoft PowerPoint.
Second, don't exaggerate or attempt to mislead a reader. An investor competent enough to buy your company is also competent enough to eventually learn the truth about your company. Be as honest as possible in the CIM. That's what buyers are expecting.
Third, and this goes back to the purpose of the CIM: Keep it concise. This means around 40 pages, although fewer is fine if that's what's required to effectively tell your story. If you feel compelled to create a CIM that's longer than 40 pages, you should feel that those "extra" pages are absolutely essential to better positioning your company in a competitive landscape.
After sending a CIM to potential buyers, you will find many will respond with additional questions deriving from their specific investment thesis. You can't try to get ahead of every question as questions change between differing theses. An industry specialist can help you create a CIM with specific data points that all investors in your vertical will want to understand. Investors will begin analyzing the data, using it in their own models; ask questions relating to their own thesis; and, if they feel like there could be an interesting opportunity, they will set up a "coffee meeting." This meeting gets final questions out of the way. When using a healthcare M&A advisor, the coffee meeting isn't something you should need to do as the seller.
From here, a potential buyer should have the preponderance of data needed to meet with you, the seller; identify chemistry and synergy; dig deeper into the data; visit your operations (if applicable); and eventually, if all goes well, submit a letter of intent (LOI).
What To Include in Your Healthcare Confidential Information Memorandum
Below we identify some of the core components of a good CIM. There may be reasons to exclude, modify, or expand on this list. Each business is different, and your M&A advisor should know what is most important to include in your CIM, assuming your advisor is a specialist in your healthcare industry.
Company overview
The first page of the CIM with meaningful content — usually the overview — gets a fair amount of attention and then most buyers will scroll to the financial section found later in the CIM. If buyers like both pages, they'll go back and read the rest of the document.
In your business overview, summarize the offering in a way any reader (potential buyer) can understand. Define your audience, which is often demographics of end users, the business types you sell to, and/or possibly a job function (i.e., your customers). Show how you solve a problem(s) and explain it in a way that's easy to follow.
The final element to include in your overview is your "secret sauce" — your unique approach to solving the problem with your target audience.
Some quick tips for writing the overview:
Avoid using adjectives like "first," "only," "huge," or "best," which are words that signal inexperience and possibly exaggeration.
Take time to properly define your target audience.
Eliminate buzzwords or jargon.
Keep it concise.
Include the ownership structure, reason(s) for the sale, and details on the desired deal structure, if known.
Company history
When you reflect on the history of your business, you'll probably think about the experience of opening the company, your first customer, the first time you hired and fired someone, your first insurance reimbursement check, a customer experience that went wrong, or a major accolade. Investors want to know about the background of your company, but they are really looking to understand your history through the lens of growth. Help buyers visualize the way your footprint expanded, customers grew, patients diversified, contracts were secured, and staff increased. Include the challenges and risk factors you faced along the way and how you overcame or navigated them.
Remember: A buyer is acquiring your business so they don't need to face all the challenges you encountered and overcame. If they wanted to face those challenges, they would start their own company. Let buyers know how much work it took to grow the company to its current state, even if those growth pains are in your distant memory.
After reading the history, potential buyers should come away with two sentiments: 1) I'm glad I don't have to go through all that effort, and 2) The skill, effort, and luck involved to advance the business to its current state are difficult to reproduce, so it's less risky to buy than build.
Team
Include an organization ("org") chart and explain why your team is qualified to execute your operations better than competitors. Work history, networks, and skills are key points to highlight, as is your history together as a team. This may include how you knew each other before working together.
Resume highlights or short bios are expected. Limit these to your leadership team. While the organization chart may show all the positions (ideally grouped by division or function), investors are most interested in and likely looking to acquire your management team. They want to know the management team that they're acquiring is worth their investment.
Healthcare market
In many healthcare verticals, the market is known or assumed, but potential buyers want to know how big the opportunity is associated with your company. Yes, they may plan to expand your business, but the core market is a starting point, and they want to know that you know it.
Beyond providing a market overview, also provide a clear picture of your audience. What is your market size? Who are they, and how many are in your market? How do you reach/communicate with your audience? What are your referral sources? What is your market position?
When putting together this market analysis, you may decide to share the "total addressable market" (TAM), which includes every potential member of your audience seeking services or products from your business, or you may decide to refine it to your "total serviceable market" (TSM), which are the customers you are able to reach.
Business model
How do you make money? Who pays you, how much, when, and from where? I've seen sellers drop the business model canvas into a pitch, but that may signal inexperience. You should be able to synthesize your business model into a succinct, visual, and possibly creative way where everyone can understand the model.
For example, with substance use disorder (SUD) providers, I model the American Society of Addiction Medicine (ASAM) continuum in a visual, then overlay the company's position in the continuum and add relevant data. See an example below. It's a simple visual to depict a client's business model, and even an investor not experienced in the space will understand exactly what the client does, how they're paid, how patients move around the continuum, and some outcome measurements.
Competition
Not all CIMs include information on competition, but I personally like to discuss it. In the SUD/mental health spaces, it's helpful to see the density of providers in a geography since that helps buyers understand in-network reimbursement rates better.
When providing a competitive analysis in the CIM, you do not need to know and/or identify every competitor, but you should have command over the competitors in proximity to your operations. Communicate how they're trying to address the problems you're working to solve and how your solution is similar or different — or whether any difference matters.
If you have a competitive advantage, share it. If your service is similar to your competitors, leave this section out. It may be unnecessary and spur questions you don't want to answer.
Business growth
Buyers deploy capital to generate a return on their investment. How might they generate a higher return on capital with your asset versus another? While you might not receive the "credit" in valuation for future revenues associated with growth (the buyer will need to do the work to achieve that growth, so they're not going to pay for it ahead of time and be accountable to execute it), you'll see increased interest from potential buyers if you can show demonstratable pathways to that growth.
Case studies that highlight a recent initiative and discuss how that initiative and its success can be reproduced is one effective way to demonstrate growth opportunities. In SUD, this may be a new level of care in an existing geography or starting an intensive outpatient program (IOP) to see if there's demand in a new geography before launching a residential treatment center (RTC). In mental health, a case study might speak to marketing to new populations, telehealth, psychedelics, or transcranial magnetic stimulation (TMS). Including data points that give a clear picture of the path toward growth can effectively demonstrate growth potential.
There are areas of low-hanging fruit for growth in most businesses. Even if they seem obvious, explain them. There are also growth initiatives you may have considered but chose not to pursue due to the effort, capital requirements, lack of manpower, lack of expertise, or simply because you were approaching a sale. Put numbers and timelines to these initiatives and offer the buyer a blueprint to a higher return on capital.
You're the expert. Help show it in the CIM. Buyers want to know what you might do to grow first before considering their own plans.
Financial overview
Historical and projected financials are key elements to a CIM. Explain volatility, and defend the proforma. Potential buyers will scrutinize any years where revenue and expense variance were substantial, so it helps to set the narrative for those likely questions in the CIM.
It's best that proformas provide a realistic outlook for the current scope and scale of the business if it is mature or a defensible and conservative outlook for growth initiatives for a newer business or startup. Sellers tend to have a bright outlook for future performance, but buyers know that storms can quickly appear in even the bluest of skies. In other words, your proforma should point "up and to the right" (it would be uncommon for an owner to believe plans will result in declining revenues) but avoid signaling inexperience by including assumptions that paint an unrealistic or overly optimistic growth trajectory.
Make sure the data you've peppered throughout your CIM clearly ties to and is reflected accurately in the proforma. We call this "tick and tie," where advisory teams put a "tick" mark next to every data point in a CIM and "tie" them out to all the other data to ensure everything checks out. If you don't tick and tie your CIM, there's a good chance a buyer will — and if they do, expect them to catch any errors, which will damage your credibility.
Metrics
Not all businesses operate off metrics, which is a travesty. If you have metrics, the key is to compare yours to industry norms. Common metrics in healthcare businesses include prior authorization versus claims collected, census, inventory turnover, and rounding, so you should be able to identify the benchmarks (a healthcare M&A advisor will help with this as well). If you have substantial variance from any benchmarks, you must address the reason(s) why. It's better to have an upfront explanation than to let buyers discover these variances and develop their own narrative for why your business is underperforming.
Creating An Optimal Healthcare Confidential Information Memorandum
Developing an informative and effective healthcare CIM takes time, expertise, comfort with software, and other skills. An experienced M&A advisor will have these skills or a team supporting them with such talents. An advisor will know how to present your company's most important data and what data to omit. An advisor will also know how to pepper the CIM with data points allowing buyside analysts to prepare their own models so they can analyze your business operating in their portfolio or model.
Completing a CIM is possible without an expert M&A advisor but doing so is not without risks. For most business owners, the work required to create a proper CIM is usually difficult to effectively execute while operating and leading the company and do so in a way that creates a limited auction for the company.
Since the CIM is essentially the first true experience, interaction, and impression a potential buyer will have with you and your company, it's likely in your best interests to hire a healthcare M&A advisor and task them with taking the lead on drafting the CIM. This will better help ensure the final document communicates what buyers want to see, positions your business correctly under current market conditions and buyer interests, and gives qualified buyers a starting point for the "coffee meetings."
David Purinton, MBA, CM&AA
After working in M+A advisory and corporate financial consulting, I was fortunate to co-found Spero Recovery, a provider of drug and alcohol recovery services with over 100 beds in its continuum of residential, outpatient, and sober living care. As its CFO I led the company to significant revenue and margin growth while ensuring it adhered to the strictest principles of integrity and client care. After selling Spero I remained in leadership with the buyer as its CFO and quickly realized accretion and integration. Of the myriad lessons not learned while earning my MBA with Distinction in Finance from a Tier 1 university, the most profound was the importance of investing in my staff and clients. I learned that the numbers on a spreadsheet represent humans, families, and dreams, which was a radically different paradigm from investment banking.
At VERTESS I am a Managing Director providing M+A and consulting services to the Behavioral Health, Substance Use Disorder treatment, and other verticals, where I bring a foundation of financial expertise with the value-add of humanness and care for the business owners I am honored to represent.
We can help you with more information on this and related topics. Contact us today!
Many small healthcare business owners struggle when they achieve a certain size or revenue stream. While these owners may see an opportunity to scale, there are challenges: They still have the "mom-and-pop" ideology (i.e., small company mentality) and their organization is not ready or capable of scaling up.
This can be a frustrating experience for an owner. They feel their company can do so much more business, yet they lack the capital, know-how, technology, and/or experience to transform their healthcare organization from a small business (e.g., $20 million in revenue) business to a much larger business (e.g., $100 million in revenue).
Such a situation is risky for a healthcare business owner. If the owner attempts but struggles to grow the revenue and/or EBITDA of the company, this could greatly devalue the business in just a few years. But that doesn't mean owners should abandon their vision for growth. Rather, they may want to explore a sale or recapitalization.
By pursuing one of these options, owners can accomplish a few worthwhile goals. They can get a nice, first "bite of the apple" for their business. They reduce their financial risk by no longer having so much of their finances in one basket. If they stay involved with the company as either a CEO or board member, they can work with a financial or strategic buyer with the experience and resources to scale and accelerate growth. This collaboration can make achieving growth goals possible and do so in much less time than if the owner attempted to achieve such growth on their own. If growth is successful, the owner and existing (or new) management team would be able to get a second — and likely much bigger — bite of the apple and then cash out with the right rollover or stock incentives.
7 Steps to Achieving an Ideal Healthcare Transaction
If proceeding with a sale or recapitalization sounds like a good plan for your business, follow these seven steps to help find the right buyer and partner who can help you take your healthcare company to a much higher level.
1. Set your healthcare transaction goals
Take time to determine the goals for the transaction you're considering. Make goals lofty but achievable. To accomplish the latter, put together a supporting team that will provide the backing and expertise you need to develop an optimal plan for moving forward. This team should be comprised of key internal executive leaders, such as the chief operations officer and chief financial officer, and key external professionals, such as a healthcare M&A advisor (like one from VERTESS), attorney, and accountant.
2. Outline your ideal situation as the owner/leader
How much of your company are you willing to sell to acquire the resources needed to achieve your growth plan? In what capacity do you want to remain with the organization following a transaction? Answering these and related questions concerning what you envision as your company's post-transaction situation and your level of continued involvement is important to ensuring an optimal outcome when your company goes to market.
3. Assess your organization's personnel
Start with your immediate leadership team and cascade down. Ask yourself questions like: Do they have the drive, capability, and experience to take on this journey? Can you envision them as part of a company you hope will be a few or even several times larger in just a few years? If you cannot answer these questions with a confident "yes," you may need to consider changes to your personnel — which brings us to the next step…
4. "Topgrade" your leadership team
Before you proceed with bringing on a financial partner, you will want to consider topgrading your leadership team. Topgrade means two things: It can be a nice way of saying upgrade your team by replacing existing leaders with better qualified leaders, and it can mean improving your current team though training.
Why is topgrading important when contemplating a sale or recapitalization? This is not the time to hope you have the right people or look past shortcomings that make these individuals less effective in their roles. Be prepared to replace leaders or find them new roles that will be better fits in support of the overall growth plan, or at least consider whether training can strengthen your existing leadership team.
If you have a solid leadership team, it's still worth taking the time to identify knowledge gaps and then invest in training and executive coaching. A financial buyer will see much higher value in an organization that comes to the table with an all-star leadership team already in place and ready to put in the work that can help achieve growth goals.
5. Test the transaction waters
Even when owners are not necessarily looking to sell, they should always be putting feelers out to gauge buyer interest in their company. This way, they won't miss key opportunities to bring in a partner, sell, or recapitalize.
If you're serious about testing the waters, this is a great time to speak to a healthcare M&A advisor and receive a valuation on your organization. A good advisor will coach you on whether it is the right time to sell and provide advice on what you should do to better prepare for a successful sale. An advisor can share competitive insights (e.g., previous competitive sales and multiples) and paint a picture of what buyers are currently looking for — and, just as important, not looking for.
If you decide to sell, an advisor can be invaluable in creating that competitive environment that attracts buyers and drives up your sale price. In addition, an advisor will aid in all the transaction negotiations and help ensure the appropriate stock options and rollover equity are included in the deal. Learn more reasons why you should work with a healthcare M&A advisor in this column by fellow VERTESS team member, Bradley Smith.
6. Identify your ideal partner
If you feel it's time to grab that first bite of the apple and your organization is ready to scale with the right plan and the right team, think long and hard about what the ideal buyer looks like. Is it a financial partner? Do you want a strategic buyer who will make your company part of a larger competitor's organization? VERTESS's Alan Hymowitz recently discussed the three predominant healthcare buyer types and the challenges associated with completing transactions with these buyers in this column.
In most scenarios where owners want to stay on with their company and cash out even bigger in a few years, the financial buyer tends to be the clearer path forward. This is not to say a strategic partnership cannot work. In some cases, it's the right decision. However, when you are looking to drive the organization beyond your current capabilities, someone who is going to invest quickly into the company and target its key needs for growth tends to be the right partner.
This is also an area where a healthcare M&A advisor can prove very helpful. Most advisors, especially ones specializing in your line of business, have extensive resources and "rolodexes" of potential buyers and can quickly help you cast the right, wide net to initiate discussions with high-quality, potential buyers.
7. Fish or cut bait
After going through the processes discussed thus far, which should help you gain a better understanding of your company, its leadership, and your potential paths forward for sale or other type of transaction, it's time to make a decision. As the owner, you will want to do what is right for you and the future of your company, including your team and its customers. If you decide to proceed with pursuing a transaction, the work you have put in should help ensure a more successful outcome. If you feel it's best to wait a year so you can better get your house in order, you will be in an even stronger position when the time is right to proceed.
Understanding Your Healthcare Transaction Options
Selling your "baby" can be emotional but exciting as well. Following the steps above and better understanding your healthcare transaction options will put you in a much stronger position regardless of whether and when you sell.
If you have questions about pursuing a sale or recapitalization, reach out to our team of expert healthcare M&A advisors at VERTESS. We'd love to learn about your business and talk about how we can work together to achieve the best path forward for you and your company.
Gene Quigley
For over 20 years I have served as a commercial growth executive in several PE-backed and public healthcare companies such as Schering-Plough, Bayer, CCS Medical, Byram Healthcare, Numotion, and most recently as the Chief Revenue Officer at Home Care Delivered. As an operator, I have dedicated my career to driving value creation through exponential revenue and profit growth, while also building cultures that empower people to thrive in competitive environments. My passion for creating deals has helped many companies’ platform and scale with highly successful Mergers and Acquisitions.
At VERTESS, I am a Managing Director with extensive expertise in HME/DME, Diagnostics, and Medical Devices within the US and international marketplace, where I bring hands on experience and knowledge for the business owners I am privileged to represent.
We can help you with more information on this and related topics. Contact us today!
Considering the substantial global and national turmoil of the past several years, it should come as no surprise that the current mergers and acquisitions (M&A) landscape is complex, and navigating it is challenging. These are a few of the main reasons why healthcare business owners and buyers frequently reach out to the VERTESS team: They are looking for expert help with executing successful transactions that meet personal and professional goals in this dynamic landscape.
A significant role we play as healthcare M&A advisors is to answer questions from our clients and prospective clients about the issues affecting sellers, buyers, and transactions more broadly. Below are 10 of the questions we are being asked and answers intended to capture the current sentiments and strategic considerations in the M&A market.
Q1: M&A deals declined in the first half of 2024. What was the cause?
A: Several factors contributed to a fairly significant downturn in deal activity. Among them: high interest rates, lower current valuations than the same period last year, and political uncertainty.
Q2: Is M&A activity likely to increase in the near future?
A: Yes, there is a strong belief that M&A activity will rebound, and it will be driven by pent-up demand from both buyers and sellers as uncertainties that have been weighing on the market begin to resolve.
Q3: How are private equity firms responding to the current M&A landscape?
A: Many private equity firms are feeling increased pressure to sell, particularly those with portfolios comprised of numerous aging companies. Such a scenario is prompting an elevated focus on realizing returns to maintain investor confidence.
Q4: Are there signs of increased activity among sellers?
A: We have seen a noteworthy rise in sale preparations, which include the development of full-potential business plans and vendor due diligence engagements.
Q5: I heard that the need for M&A is greater now than in previous periods. Why is this the case?
A: We canpoint to the cumulative pressures of low-growth economic conditions combined with the need for businesses to adapt and innovate as reasons that are driving an elevated interest in strategic transactions.
Q6: Artificial intelligence (AI) continues to be a big topic of discussion within and outside of healthcare. How could AI influence M&A transactions?
A: Generative AI, which is the use of algorithms (e.g., ChatGPT) to create content, has the potential to disrupt various sectors, including healthcare. Disruption creates challenges and opportunities for companies. This then influences M&A strategies — potentially significantly, depending upon the extent and short- and long-term impact of the disruption.
Q7: When is the optimal time to sell my business?
A: The optimal time to sell is when you, as the owner, feel personally ready to move on to your next chapter, whether that's retirement, starting a new venture, or spending more time with family.
Q8: How should I take market conditions into consideration when deciding whether to sell my company?
A: While market conditions usually influence the valuation and sales price of a company, they should not be the primary factor in your decision to sell. The timing should be based on your readiness rather than trying to time the market. My colleague, Bradley Smith, tackled the topic of timing the market for an exit in this column.
Q9: How do rising interest rates impact the sale of my business?
A: Rising interest rates can affect the overall financing landscape, making it more expensive for buyers to obtain the loans they typically need to make acquisitions. However, it's important to understand that buyers adapt to these changes. While the cost of debt has increased, many buyers are shifting toward equity financing and still actively seeking acquisitions. Interest rates may influence buyer behavior, but they won't necessarily deter potential buyers from pursuing your business.
Q10: Is feeling burned out with my business a good reason to consider selling?
A: It's a very good reason to consider selling. When enthusiasm for owning and operating a company declines, it will likely negatively affect your business and its performance. This may not only hurt your company's valuation and thus its sales price, but it may also turn away buyers who see a company moving in the wrong direction.
Ready to Answer Your Healthcare M&A Questions
These questions and their responses help paint a picture of the current M&A market and key considerations for sellers and buyers. They also emphasize the importance of remaining adaptable and well-informed as you pursue a sale of your healthcare company or acquisitions of businesses. If you are looking for expert assist with transactions, including getting questions like those above answered, reach out. The VERTESS team of Managing Directors, who are focused on specific healthcare verticals, would welcome the opportunity to speak with you about your situation and what we can do to help ensure you achieve the best transaction outcome possible.
Anna Elliott CM&AA
With over 15 years of experience in healthcare technology, post-acute care, hospice, and urgent care, I am a highly experienced healthcare executive. I have successfully supported numerous private equity roll-ups and exits in the home healthcare sector. My extensive knowledge of the healthcare industry and my leadership in the M&A community, as a certified M&A Advisor (CM&AA) and member of the Executive Committee of the Chapter of the Association for Mergers & Acquisitions Advisors (AM&AA), distinguish me from others in the field.
Throughout my career, I have specialized in healthcare and have excelled in attracting healthcare technology firms and industries that are growing through Mergers + Acquisitions. I have a strong ability to target specific needs and opportunities in the business supply and demand process, resulting in over $150 million in value delivered to organizations.
As a co-founder of M&A Finders, a boutique Merger and Acquisition advisory firm in Pittsburgh, I have been able to pursue my passion for advocating on behalf of buyers and sellers in achieving their M&A goals. I am excited to bring my skills and network to VERTESS, where I have access to the necessary resources to further expand my impact in the healthcare industry.
We can help you with more information on this and related topics. Contact us today!
Last year, I wrote a column on "Choosing a Buyer: Private Equity vs. Search Fund vs. Strategic." As the title would suggest, this well-received piece discussed the three predominant buyer types — private equity group (PEG), search fund, and strategic buyer — healthcare business owners are likely to encounter when they decide it's time to sell their company and what sellers should know about them. I have had the good fortune of closing deals with each of these buyer types over the past few months, so I thought it would be worthwhile to do a follow-up piece to this column — one that discusses the challenges associated with getting transactions involving these buyers to and across the finish line.
Each buyer type has its own challenges, and understanding how to navigate them most effectively and efficiently is one of the most important roles I play as a healthcare M&A advisor. As I collaborate with seller clients to overcome these roadblocks and any curveballs, I am focused on achieving not only the best valuation for clients but also the deal structure that would most benefit them. Understanding how buyer types differ in how they structure offers and prefer to proceed through the due diligence phases is essential to achieving a seller's goals and ultimately a successful transaction and transition.
Let's take a closer look at each of these three buyer types and key points to know about their acquisition approach.
Private Equity
PEGs are also referred to as financial buyers. As this name suggests, their approach is largely based on a healthcare company's financials. Broader due diligence focuses primarily on intense auditing of documents like profit and loss (P&L) statements, balance sheets, and bank statements for the trailing 12 months up until 30 days prior to close.
Legal due diligence will focus on areas like contracts, state boards, and regulatory issues. Sellers should expect weekly due diligence calls with a PEG's legal, tax, regulatory, management, accreditation, licensing, and human resources representatives, and must be prepared to answer their questions and produce any documents requested. At closing, other legal steps must be completed, such as a reorganization.
The deal structure will likely include shared risk, rollover equity, non-competes, earnouts, and employment agreements. Given this continued involvement from ownership, it is worth noting that PEGs used to largely approach acquisitions with a 5-7-year turnaround plan. That plan can now last longer, even surpassing 10 years.
A PEG is more likely to desire keeping the existing management team in place, unless a necessary change is identified during due diligence.
Search Fund
Also referred to as unfunded sponsors, search funds take a "buy-and operate" approach to acquisitions. This translates to current owners usually only remaining for a short consulting period post close.
Search funds come to transactions with previous and fairly extensive knowledge about the company's sector and what's required for success within it. These buyers focus less on financials and the likes of P&L and balance sheets. They look for profitable companies with strong potential growth and return. These are important given that search funds usually have no growth capital, which places greater emphasis on current and potential legacy growth.
Search funds tend to require strict non-competes and expect that current, essential staff will remain with the company while also usually turning over upper management. Scrutiny and audits of an acquisition focuses on regulatory issues, changes of ownership (CHOWs), and any legal issues past and present.
Following the signing of a letter of intent, search funds work to secure funding for the acquisition. The capitalization table (i.e., cap table), which shows a company's ownership structure, will change daily or weekly depending on what's discovered in due diligence up until the day a transaction closes. Each search fund investor has its own requirements.
Finally, search funds tend to hold onto assets longer than PEGs.
Strategic Buyers
These are typically what are referred to as "non-financial" (to contrast PEGs) or "buy-and-build" buyers. They tend to already be well-established in the industry in which they are pursuing an acquisition. Thus, they come to the transaction table with vast knowledge but not necessarily the personnel, so they tend to need the talent and resources that come with the acquisition.
As the descriptor of non-financial buyer suggests, strategics are less focused on financials of the company. Rather, the acquisition is motivated by one or more of needing the acquisition's location, talent, contracts, or customers, or a desire to eliminate a competitor. Strategic buyers also view acquisitions as a way to pursue and further achieve economies of scale.
Strategic buyers tends to have a shorter due diligence period than the other buyer types.
Private Equity, Search Fund, and Strategic: Completing Your Sale
If you're operating a good company, finding interested buyers is usually easy. What comes next is much more difficult, which points to the value of working with a healthcare M&A advisor, like those at VERTESS. Determining a desired exit strategy and optimal buyer type, bringing a company to market, attracting the right buyers, properly vetting buyers, selecting a buyer, and finally navigating the subsequent transaction processes all include challenges that can derail an optimal and successful outcome.
The VERTESS team is comprised of advisors with extensive experience operating healthcare companies and working with all buyer and seller types. We support clients through the entire M&A process and beyond, which includes helping clients achieve a smooth post-transaction transition.
Reach out to learn more about how VERTESS is helping business owners like you achieve successful sales.
Alan Hymowitz, CM&AA
During the past decade I have facilitated numerous, diverse M+A transactions in the pharmacy marketplace across the country, as well as providing strategic consultation to national pharmacies and similar organizations. Prior to becoming an M+A advisor, I was a “hands on” owner and manager in the pharmacy and home infusion healthcare marketplace for over 15 years, and successfully sold my pharmacy to a national company after growing and diversifying our income streams in a very competitive market. My specialties in the pharmacy and home infusion marketplace include long term care, retail pharmacy, specialty pharmacy, and home healthcare, and I have attained the URAC Accreditation and Specialty Pharmacy Consultant designations, in addition to other recognition. My educational background includes a Bachelor of Arts from Rutgers University and a Master of Arts from the John Jay College of Criminal Justice.
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When we are approached by healthcare business owners contemplating a sale and researching their options for assistance, a common question we're asked is: "Why should I hire a specialized healthcare mergers and acquisitions (M&A) advisor for my company?"
The simple answer is that an M&A advisor who specializes in healthcare is more likely to help owners achieve successful transactions, with "success" including a fair sales price and the passing along of the business to a company that will continue to treat staff and customers well.
9 Reasons to Work With a Healthcare M&A Advisor
For a more complete answer to why healthcare business owners should work with healthcare M&A advisors, here are nine reasons.
1. Leveraging extensive experience
A healthcare M&A advisor generally has experience in representing companies in various healthcare verticals and broad knowledge of the healthcare industry. This will help a business owner prepare for the sales process with insights about the owner's unique market. When the advisor is part of a larger healthcare M&A advisory firm, like VERTESS, they are further supported by other advisors and experts who can share additional insights.
2. Improving the selling process
Selling a healthcare business is a complex process filled with multiple tasks that can be overwhelming and often underestimated by owners given that most have not experienced the sale of a company before. Simultaneously, a healthcare business owner is typically busy running their company, which limits the amount of time and energy that can be allocated to the sales process.
Bringing aboard a healthcare M&A advisor can smooth the transaction process while better ensuring a high return on investment. There are always obstacles and bumpy roads in the process of selling a healthcare company, but a savvy advisor helps sellers navigate them and avoid the many reasons transactions can fail to secure a successful agreement with a buyer or investor.
3. Maximizing healthcare business value
A healthcare M&A advisor will be able to market the healthcare company to more targeted buyers, and this will often lead to more high-quality partner options for the seller. More value could mean creative strategic partnerships, maintaining the owner's legacy, retaining a core management team, and higher price and/or better terms in the sales agreement.
4. Integrating healthcare knowledge into marketing
Effective healthcare M&A advisors integrate their knowledge of a specific healthcare vertical and broader healthcare industry knowledge into their marketing approach. Utilizing established industry relationships and networks, a healthcare M&A advisor can connect sellers with buyers and investors that have the highest appreciation for the seller's market segment and potential value of their business.
5. Showcasing value
Through their many years working in the healthcare industry, a veteran M&A advisor has learned what financial analysis and presentation will resonate most with potential buyers. As a result, they will make sure that marketing materials feature a professional financial analysis that contributes to the highest valuation.
6. Painting a complete picture
Skilled healthcare M&A advisors generate a confidential information memorandum (CIM) — otherwise known as "the marketing book" — to tell a healthcare company's story to prospective buyers. The CIM includes information that speaks to significant areas of interest for buyers, such as successes, differentiators, growth opportunities, local market dynamics, and larger healthcare market trends. The completeness of the CIM is usually correlated to the healthcare M&A advisor's understanding and experience and their ability to tell the compelling story of the healthcare business and its owner(s).
7. Managing the healthcare transactions process
Competent healthcare M&A advisors will manage a sales process in which various buyers are screened by level of interest, commitment, and financial qualification to complete a fair transaction. Within their networks, healthcare M&A advisors often access unique market intelligence to assist them in their representation and execution.
8. Closing the deal
Healthcare M&A advisors often know about unique, market-related nuances that will help with the final negotiation of deal terms. This understanding can help guide the business owner through escrows, non-compete or interim management agreements, and other critical decisions on the way to a successful sale.
9. Delivering value
The ninth and final reason to work with a healthcare M&A advisor — delivering value — is a composite of the above. In a time of much turbulence and opportunity in today's healthcare industry, an accomplished healthcare M&A advisor often brings value that far exceeds their fee while helping sellers reach the goals that were established prior to starting the sales journey.
VERTESS: A Top Healthcare M&A Advisory Firm
If you're contemplating a sale of your healthcare business and are looking for a partner that can help you achieve your sales goals, reach out to VERTESS. Our team of Managing Directors, who specialize in specific healthcare verticals, has the extensive healthcare transaction experience that leads to more successful sales. This track record recently helped us earn the distinction of being named the #1 lower middle market investment bank for the first quarter of 2024 by Axial, and I was proud to be recognized as the advisor for one of Axial's top 8 deals in 2023.
To learn what VERTESS advisory services can do for you and your healthcare business, reach out to us today!
Bradley Smith ATP, CM&AA
For over 20 years I have held a number of significant executive positions including founding Lone Star Scooters, which offered medical equipment and franchise opportunities across the country, Lone Star Bio Medical, a diversified DME, pharmacy, health IT and home health care company, and BMS Consulting, where I have provided strategic analysis and M+A intermediary services to executives in the healthcare industry. In addition, I am a regular columnist for HomeCare magazine and HME News, where I focus on healthcare marketplace trends and innovative business strategies for the principals of healthcare companies.
At VERTESS, I am a Managing Director and Partner with considerable expertise in Private Equity Recapitalizations, HME/DME, Home Health Care, Hospice, Medical Devices, Health IT/Digital Health, Lab Services and related healthcare verticals in the US and internationally.
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FORT WORTH, Texas, July 24, 2024 /PRNewswire/ -- As healthcare-specific merger and acquisition (M&A) advisors, VERTESS (https://vertess.com/) has been asked frequently by healthcare business owners "How is the market in 2024?" and "Is now a good time to sell my company?" We understand that most owners believe they must wait until the market tea leaves reveal the optimal time to sell to secure the best price. In response, we can speak to significant macro conditions, such as interest rate activity, inflation shifts, and global events. Those all will generally have an impact on prices of transacted companies. However, the far more critical indicator for when a sale is optimal will always be when the owner is ready to move on to whatever is next in life.
At VERTESS, we recognize that owners are likely the most important person to the business. They are its biggest cheerleader. They have invested more in it than anyone else, so they typically will make the biggest and greatest impact on the business. If owners wait to try to time the market or take advantage of some other perceived opportunity, they run the risk of souring on the business and becoming burned out or disenfranchised. If that happens, the business is going to suffer, and that will likely lead to a decline in sales price.
Of course, interest rates continue to be a substantial issue affecting healthcare businesses. They are high and the Fed isn't likely to start reductions until the end of this year or the beginning of 2025 due to sticky inflation and a strong labor market. If an owner wants to get a bank loan for their business, they're looking at 10-plus percent. How has the market responded to rising interest rates? Bank loan activity has slowed, and people are deploying more equity. Private equity firms are maybe doing one or two turns of debt equity, with the rest of their payment coming out of pocket. Two years ago, when interest rates were about half of what they are now, these firms might do half a deal in debt.
Buyers find a way to evolve to what's happening in the market and buy the businesses they want to acquire. Buyers, especially strategics, bake acquisitions into their growth strategies. It's their "buy-and-build" strategy. Buyers know they're going to grow organically every year at X rate, and then they plan for inorganic growth at a certain rate, which is accomplished through acquisitions. Inorganic growth is typically identical to, if not larger than, organic growth rate.
Regardless of the market today or what's projected over the next 12-plus months, buyers are going to set acquisition mandates and work to achieve them. Buyers need to buy companies to scale their businesses. It's part of part of the fabric of their operations and what they're used to doing — and that's not going to change, regardless of what's happening nationally and internationally.
"Ultimately, owners should know what's happening in the market as this can affect matters like budgeting, staffing, and purchasing. But when it comes to selling your company, don't let what is happening in the market influence your plans. The risks of doing so far outweigh any potential benefits," cautions VERTESS Managing Director/Partner Bradley Smith. "If you own a successful business, you should be able to find a buyer and one that offers you a good, fair price, regardless of what's happening in the market. The key to a successful sale is to run a proper process that results in all interested buyers — and the right buyers — coming together simultaneously and making their best offers. That's how you'll know you're getting the best price for your company."
For more information, please contact Vaughne Glennie at 380788@email4pr.com or +1.520.395.0244.
FORT WORTH, Texas, July 16, 2024 /PRNewswire/ -- VERTESS (https://vertess.com), a leading healthcare mergers and acquisitions (M&A) advisory firm, is pleased to announce the successful completion of a third pharmacy deal this year. This deal closely follows two additional pharmacy transactions completed in Q2.
Keystone Specialty Pharmacy (https://keystone-pharmacy.com/), a customized, specialty pharmacy out of Mississippi, was purchased by Novastone Capital Advisors (NCA) (https://www.novastone-ca.com/index.php), a Switzerland-based private equity firm, as part of their Entrepreneurship through Acquisition (ETA) Program. Keystone prides themselves on offering health care providers new resources to treat serious infections while also being committed to maintaining the highest ethical standards in business. Dr. Lisa Piercey, NCA's Entrepreneur, will lead the pharmacy as it continues its mission of providing critical care.
The transaction was overseen by VERTESS Managing Director, Alan Hymowitz, who previously owned and operated a pharmacy before his tenure at VERTESS. His unique background was invaluable in leading this transaction to a successful conclusion. He noted what a demanding and lengthy process this transaction was, but that he is thrilled for his clients to see this deal across the finish the line.
Keystone owners, Jeffrey and Kim Clark, reflected on the transaction process sharing, "Alan Hymowitz and the team from VERTESS understood the importance of finding a strategic investor who would continue our mission 'Our goal is to heal and not refill.' VERTESS found the ideal fit for our pharmacy, one who we have confidence will take care of our patients with excellence while expanding the business we started. We are extremely grateful to Alan, David Coit, and the rest of the VERTESS team for their diligence and expertise in bringing our deal to close. Their guidance through this process has been a blessing to us both."
For more information, please contact Vaughne Glennie at 380413@email4pr.com or +1.520.395.0244.
Volume 11, Issue 13, July 16th, 2024
By: Dave Turgeon and Jack Turgeon
Private equity often carries a negative connotation in the healthcare industry. However, if you are considering selling your business, it's crucial to understand the impact private equity has on the overall deal market and the sale of your company. At VERTESS, we focus exclusively on transactions in various healthcare sectors. By tracking the activity of private equity groups, or PEGs, we gain insights into the current market dynamics, allowing us to better advise our clients on what to expect when selling their businesses.
In this column, we will briefly define private equity, then dive into the influence of it on the sale of healthcare businesses, current trends in healthcare private equity activity, and what business owners should consider when planning to sell their companies.
What Is Private Equity? Private equity is an alternative investment strategy that allows institutional and accredited investors to invest in private markets. These groups invest in private businesses to increase their value over a holding period — one typically lasting 5 to 7 years. PEGs have an ultimate goal of selling the businesses for a profit.
One strategy for increasing the value of these portfolio companies is through mergers and acquisitions (M+A), where companies consolidate multiple businesses under a single entity. By acquiring regional and national competitors or businesses with synergistic lines, these portfolio companies can add revenue and earnings, thereby increasing their value when sold.
What Influence Does Private Equity Have on Selling Your Healthcare Business?
Why is private equity important for business owners? When you decide to sell your healthcare business, you will likely receive offers from multiple entities, potentially including private equity-backed portfolio companies and private equity funds. Tracking their activity in the market can help you understand what to expect when selling your business. While private equity groups are not the only buyers in the market, knowing how they acquire and invest in companies provides valuable insights into the market as a whole.
Where Things Stand: A Closer Look at Private Equity Activity in 2024
In 2023, M+A activity was sluggish across most sectors and especially in healthcare. High interest rates lowered business valuations, creating a gap between owners' expectations and buyers' valuations.
In the first half of 2024, private equity showed signs of recovery in the global M+A market. After a slow start, private equity deal activity increased, stabilizing its market share and alleviating concerns about private equity's role in the anticipated M+A rebound. Exit activity, crucial for healthcare industry growth, improved significantly after a long period of stagnation, elevating fundraising and capital availability for future investments.
Private equity fundraising exceeded expectations, showcasing the healthcare industry's resilience and continued investor confidence, despite an anticipated slowdown in the latter half of the year. Middle-market funds performed well, in contrast to the more challenging environment for megafunds.
As the stock market includes more smaller cap stocks, private equity valuations and exit opportunities are expected to improve further. The healthcare industry's adaptability and forward momentum amid challenging conditions highlight its potential for continued growth and success.
Looking at the more recent quarter of 2024 (Q2), healthcare private equity activity showed promise despite a lighter quarter overall. The healthcare sector accounted for a substantial portion of deal activity, with numerous transactions reflecting strong down-market deal flow. Notable deals included Cotiviti's recapitalization by KKR and Veritas and Thomas H. Lee Partners' acquisition of Agiliti, indicating ongoing interest in healthcare investments. Healthcare services dominated private equity deals, while pharma services also attracted significant interest, with multiple platform deals closing.
The demand for weight-loss drugs sparked interest in peptide manufacturing, aligning well with private equity's focus on consistent business models. Despite high valuations and economic uncertainties, the healthcare sector remains robust for private equity investment, driven by strategic acquisitions and divestments.
In conclusion, the first half of 2024 has shown encouraging signs of recovery and growth for private equity in both the general M+A market and the healthcare sector. Improved deal activity, strong fundraising, and strategic investments indicate a resilient and adaptable industry poised for continued success. The healthcare sector, in particular, remains a key area of interest for investment groups, with ongoing investment opportunities driven by market demand and strategic divestments.
Current Private Equity Activity Is Good News for Healthcare Business Owners
Understanding private equity activity is crucial for healthcare business owners considering selling their companies. The current market conditions in the first half of 2024 have shown recovery and growth in private equity, particularly in the healthcare sector. Improved deal activity, strong fundraising, and strategic investments indicate a resilient and adaptable industry poised for continued success.
As deal activity increases for private equity firms, this signals that buyers will be actively seeking investments in the healthcare market. Private equity firms aim to increase the value of their investments through market consolidation and eventually exit from these investments in the coming years. This positive trend in deal activity among private equity firms suggests favorable conditions ahead for the sale of healthcare businesses, regardless of their size. For business owners, staying informed about private equity trends and market dynamics can provide valuable insights and better prepare them for potential sales, ensuring they achieve the best possible outcomes in a competitive market.
At VERTESS, we specialize in healthcare M+A transactions by working with business owners to capitalize on these market opportunities and negotiate the best deal possible for their business. We have built a network of relationships with buyers in our key verticals to ensure we bring the right pool of buyers to any client. This will help not only achieve the best outcome in purchase price but also the best post-transaction fit for their business, employees, and clients. If you would like to learn more about the state of healthcare M+A and investing or how VERTESS is particularly well-suited to help sell your healthcare business, please reach out to us.
Dave Turgeon, CM&AA
I’ve been fortunate to work for several exceptional companies. I’ve contributed in roles that include CEO, COO, and managing growth. I’ve been part of private equity-backed companies focused on building value and growing, which has allowed me to acquire of hundreds of companies and invest billions of dollars. I began focusing on behavioral health about twelve years ago based on a family member. Many people know me from my experience running the M&A efforts at Civitas Solutions leading up to their successful IPO in 2014. I feel very fortunate to be in a position now to help business owners who built companies whose mission it was to care for others. I’m in the unique position of helping them get the very best deal possible
As a Director at VERTESS, I bring extensive experience in sales, consulting, and project management from early-stage startups. With an MBA from Babson College, I have a strong foundation in business strategy, operations, and financial analysis. My personal connection to behavioral healthcare through a family member motivates me to help business owners get the best deal possible while ensuring high-quality care for their clients. Throughout the M&A process, I provide comprehensive support at every step. I have a proven track record in negotiations and client management after working with companies in various industries. I’m excited to join VERTESS and make a meaningful impact on the lives of the owners I work with.
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Volume 11, Issue 12, July 2nd, 2024
By: David E. Coit, Jr., DBA, CVA, CVGA, CM&AA, CBEC, CAIM
Why should a buyer's costs of integrating an acquired company be of interest to the seller? The most important reason is that sellers often pay part or all the integration costs of the buyer. According to McKinsey & Co., the average cost of integration is between 15% and 20% of an acquisition's purchase price.
How do buyers' integration costs become a concern for sellers? Buyers typically determine the offering price based on expected future cash flows received from the acquired company. When buyers estimate future cash flows, they often include the anticipated costs of integrating the acquired company. Thus, the purchase price is often net of the buyer's expected integration costs.
If you're considering a sale of your healthcare company, you might be wondering: What can I do to influence the buyer's cost of integration?
That's a great question! There are several actions sellers can take before going to market that can reduce the buyer's integration costs. Moreover, those cost savings may allow potential buyers to increase their offering price because of a perceived increase in first-year cash flows from the acquisition.
How to Cut Healthcare Acquisition Integration Costs
Let's discuss eight areas where sellers may want to take steps before selling their company that can reduce a buyer's integration costs and potentially increase offers and the final sale price.
1. IT software applications
Buyers typically migrate the information technology (IT) used by an acquired company to match the applications the buyer uses. Software migration can be a costly and time-consuming process, especially if the seller is using legacy systems and outdated technology, in-house developed software, and/or has inaccurate or incomplete data. On the other hand, using widely used, industry-specific applications and having clean and current data will considerably ease the migration process.
In addition, providing buyers with a listing of IT applications used, the methodology of data collection and data verification, and a scheduled IT software maintenance program will allow buyers to better determine the estimated time and expense of IT integration.
2. Repair and maintenance
Believe it or not, some sellers defer routine repair and maintenance in the months leading up to the sale of their business. While this may seem like a good way to increase the seller's cash flow before selling their business, buyers will likely discover such deferred expenses during due diligence and predictably take a dim view of such actions. Moreover, buyers will estimate their costs of remedying or mitigating the deferral.
It's better to keep up with scheduled repairs and maintenance as though the business wasn't being sold than having buyers decrease their offering price to account for these necessary expenses. However, sellers should not needlessly incur excess repair and maintenance costs before going to market. Keep in mind that companies sell for a multiple of cash flow. As such, every dollar increase in cash flow returns a greater dollar amount in the price of the company.
3. Turnover
Buyers usually expect a post-acquisition drop in the acquired companies' revenue due to employee turnover, client/patient turnover, or referral source turnover. A key aspect of integration is the retention of essential employees, clients/patients, or referral sources.
If the seller can show buyers that they've taken and will continue to take actions to mitigate turnover, buyers will be less concerned about revenue loss and the associated costs of retention. In addition, sellers who demonstrate a commitment to work after the sale to address possible retention issues show good faith to prospective buyers.
4. Capital expenditures
Buyers often expect that sellers have underinvested in capital expenditures (Capex) leading up to the sale of their healthcare businesses. Appropriate investment versus underinvestment is a difficult issue to address. On the one hand, replacing older equipment does not necessarily increase the offering price from buyers. On the other hand, buyers may adjust their offering price after due diligence once they've determined the estimated costs associated with underinvestment.
A good rule of thumb is to continue Capex dollars based on historical needs. In other words, consider keeping up with maintenance Capex but limit the amount spent on long-term growth Capex. The most typical underinvestment in Capex is new computers for employees. Beware of acquiring new computers that may not meet the buyer's IT specifications. In other words, be smart and frugal with CapEx dollars before going to market.
5. Facilities
Before interacting with potential buyers, a seller won't know the facility needs of buyers. Many buyers don't want to own real estate. Others may have operations with excess capacity near the seller's location(s).
Perhaps the best way to address the issue of facilities is (1) the seller should not undertake any leasehold improvements before going to market, (2) sellers should avoid long-term lease extensions or related commitments, and (3) if the facility(ies) is/are owned, consider looking into alternative options should the buyer chose not to acquire real estate. Sellers don't want to be in a position where the buyer decreases the offering price because the seller needs to unwind facility(ies) commitments.
6. Open staff positions
It's commonplace for sellers to avoid filling open staff positions before selling their business. Such situations can be a two-edged sword. The buyer will discover unfilled positions during due diligence and factor in the cost of filling the positions by repricing their offer. On the other hand, the seller may be able to fill open positions at a wage rate or salary lower than the buyer's estimated compensation. Conversely, the buyer may be able to fill certain open positions where the buyer has existing staff to fill open positions.
I recommend the seller discuss this matter with their healthcare M+A advisor or potential buyers before the buyers make an offer to acquire the business. One other consideration is the potential to outsource open positions with independent contractors. For example, contracting with a fractional chief financial officer rather than hiring a full-time CFO.
7. Contracts, licensing, certifications, and subscriptions
Buyers will discover any past-due, expired, or soon-to-expire contracts, licensing, certifications, or subscriptions (CLCS). Sellers should keep essential CLCS' up to date. However, before going to market, sellers should evaluate each CLCS to determine the value of reviewing or extending the CLCS. For example, older certifications may be of little value because of changes in the industry. Similarly, certain subscriptions may not be of value to buyers and thus an unnecessary waste of funds.
For example, some physicians elect to be members of various associations like the American Medical Association, Medical Group Management Association, and/or state medical societies. If these CLCS do not drive revenue or business value, consider not renewing the CLCS.
8. Accounting/financial reporting
We regularly advise our clients whose financial reporting is on a cash basis to convert to an accrual basis before going to market. Accrual basis accounting is a more accurate method of financial reporting than cash basis accounting. We also recommend that their accrual basis accounting conform with generally accepted accounting principles (GAAP).
One way to ensure that a company's financial statements are GAAP compliant is to have a CPA firm perform an audit. Audited financial statements can provide buyers with confidence in the reliability of the financial reporting.
An alternative to having audited financial statements is to have an accounting firm prepare a seller's quality of earnings (QofE) examination. A QofE is an assessment of a company's performance that removes anomalies and poor accounting or bookkeeping methodologies, and more accurately reports a company's true performance.
Many buyers will undertake a QofE as part of their due diligence process. When sellers provide buyers with a seller's QofE report, as my colleague Bradley Smith discussed in this column, buyers gain confidence in the accuracy of the seller's financial reporting.
Moreover, buyers may either accept the seller's QofE rather than having a third party perform a QofE or hire a CPA firm to review the seller's QofE report. In either case, the buyer saves time and money and will be able to quickly determine the riskiness of the seller's company.
Impact on a Potential Healthcare Acquisition
Imagine you are looking at acquiring one of two healthcare companies in your industry. One of the companies uses similar IT software applications as you; keeps current on routine repairs and maintenance; has a sound record of low employee turnover; has no underinvestment in Capex; has the option to renew their facility's lease (which is now month-to-month); has no unfilled staff positions; is current with all contracts, licensing, and certifications; only has necessary subscriptions; and has accurate and verified financial reporting.
The other company is using proprietary or in-house developed IT software applications, is significantly delinquent in routine repair and maintenance; has higher than usual employee turnover; is underinvested in Capex; has a long-term facility lease contract on an undesirable property; has several unfilled open staff positions; is past-due on renewing contracts, licensing, and certifications; has many unnecessary contractual subscriptions; and has numerous accounting errors in their cash basis financial statements. Which company would you be willing to offer a higher purchase price? Which company would you perceive as a risky investment? Which company would you expect to spend less money on during integration?
It's easy to see how putting in some work to reduce acquisition integration costs can lead to more offers and higher offers while increasing the likelihood of a successful sale. If you are thinking about selling your healthcare company and would like to discuss ways to decrease acquisition integration costs and make your business more appealing to prospective buyers, reach out to me or any other member of the VERTESS team. We would welcome the opportunity to speak with you!
David Coit DBA, CVA, CVGA, CM&AA, CBEC, CAIM
I am a seasoned commercial and corporate finance professional with over 30 years of experience. As part of the VERTESS team, I provide clients with valuation, financial analysis, and consulting support. I have completed over 400 business valuations. Most of the valuation work I do at VERTESS is for healthcare companies such as behavioral healthcare, home healthcare, hospice care, substance use disorder treatment providers, physical therapy, physician practices, durable medical equipment companies, outpatient surgical centers, dental offices, and home sleep testing providers.
I hold certifications as a Certified Valuation Analyst (CVA), issued by the National Association of Certified Valuators and Analysts, Certified Value Growth Advisor (CVGA), issued by Corporate Value Metrics, Certified Merger & Acquisition Advisor (CM&AA), issued by the Alliance of Merger & Acquisition Advisors, and Certified Business Exit Consultant (CBEC), issued by Pinnacle Equity Solutions, and Certified Acquisition Integration Manager (CAIM), issued by Intista. Moreover, the topic of my doctoral dissertation was business valuation.
I earned a Doctorate in Business Administration from Walden University with a specialization in Corporate Finance (4.0 GPA), an MBA from Keller Graduate School of Management, and a BS in Economics from Northern Illinois University. I am a member of the Golden Key International Honor Society and Delta Mu Delta Honor Society.
Before joining VERTESS, I spent approximately 20 years in commercial finance, having worked in senior-level management positions at two Fortune 500 companies. During my commercial finance career, I analyzed the financial condition of thousands of companies and successfully sold over $2 billion in corporate debt to institutional buyers.
I am a former adjunct professor with 15 years of experience teaching corporate finance, securities analysis, business economics, and business planning to MBA candidates at two nationally recognized universities.
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At least seven out of 10. That's at the low end of how many mergers and acquisitions (M+As) are likely to fail. The high end? Nine out of 10.
These are not misprints. They are conclusions of research, as referenced by Harvard Business Review and other publications. They tell us that 30% of M+As at most succeed, while only 10% are essentially assured to succeed.
These M+A failure and success figures were determined via examination of a large pool of deals in every business sector. Common reasons frequently cited for such a high failure rate include an uninvolved seller, culture shock at the time of the integration, and poor communications from the beginning to the end of the M+A process.
With the odds seemingly stacked against healthcare business owners, why would you consider selling your company, especially if you expect to be invested (financially and/or personally) in the future of the business after a transaction?
At VERTESS, we have found that the M+A process can be navigated and lead to a higher success rate when have the right information and team to work with. It also helps to understand what can go wrong and how to avoid making these mistakes. I personally have a closing rate of about 82%.
Here are 10 of the factors that can lead to failed mergers and what is necessary to overcome the shortcomings.
1. Not knowing the motivations of buyers and sellers
There are essentially two kinds of sellers: one that looks for the most money for their business and one that needs to find the perfect buyer for the individuals, families, staff, and community related to the business. Buyers, on the other hand, come in all shapes and sizes, from strategic buyers that are looking for growth to financial buyers (private equity) looking to build and flip — and many shades in between.
If a transaction has any hope of being a success, it is important to determine the motivations for both parties. At VERTESS, we always discuss what is most important to sellers well before bringing their business to market. We also carefully screen all buyers to understand their intention and assess if there is a good fit.
These steps help with winnowing down what could be a lengthy list of prospective buyers to those that align well — at least on paper — with a seller. If there isn't good alignment, there is likely no reason to continue conversations with a prospective buyer.
2. Unrealistic expectations
It's not unusual for sellers to believe they should receive a certain amount of money — usually a particularly high amount — for their business because that's what they believed the company was worth. Sellers often estimate what their company is worth after hearing about transactions for other companies in their market, reading articles and columns that discuss multiples and prices paid, or being approached by a prospective buyer that casually threw out some figures.
The numbers sellers envision are often unreasonable. That doesn't mean they don't have a good company that should do well on the market. Rather, it means that most people naturally believe that something they value is valuable — and often more valuable than the market would believe. A financial analysis and valuation can reveal figures that are objective and in line with similar transactions. Most buyers are unwilling to cross certain thresholds, regardless of how amazing a business may be (or seem to be to a seller).
Ultimately, a company is worth what someone is willing to pay for it. The only way to maximize a valuation of a company is to run a process that brings in all the buyers and has them make offers simultaneously. Anything less will likely result in selling your company for less.
A seasoned healthcare M+A professional can help prepare a seller ahead of time for the selling experience, including what offers to anticipate. Both parties should reach an understanding of the expectations of the sale before going to market.
3. Hidden debt and financial instability
Buyers understand sellers sell for many reasons, including the fear of losing the company because of debt or money stresses. However, no one wants to be halfway through a transaction due diligence process only to learn about the numbers trailing downward or worse: the posting of foreclosure notices. This tension for a seller will often lead to poor decisions. Any buyer will be aggressive and take advantage of the situation.
Be forthcoming with your healthcare M+A advisor. Paint the complete, honest picture of your business — its successes and especially the struggles and how you overcame them. Transparency is essential. With a clear understanding of your business, the advisor may have some immediate suggestions to stabilize the situation until the right buyer is found or can help fast-track the process to maximize value.
4. Inaccurate financials
The first step of our process here at VERTESS is to present to sellers a financial picture of their business the way that buyers will assess it. We help formalize even the most difficult financial (e.g., QuickBooks) records. We also complete a proforma that projects future earnings and opportunities.
Despite our best efforts, there are ways these processes can lead to the presenting of incorrect information. How? The numbers we use are provided by the sellers. If the data shared with us is incorrect, we will then be working with incorrect data, and we may not be able to identify all the errors. In addition, most buyers will convert the financials to an accrual basis and expect them to be compliant with generally accepted accounting principles (GAAP). This exercise will compromise a weak set of books and lead to inaccuracies.
We have seen sellers overinflate growth for future years, underestimate the cost of their services, or book revenue incorrectly. We can often secure a great offer with these numbers. However, once under a letter of intent (LOI), the buyer will conduct a quality of earnings (QofE) review. That's often when we learn that the numbers provided to us are not accurate. The result? The buyer either adjusts the purchase price accordingly or pulls the offer.
5. Quality of earnings
Speaking of quality of earnings, in today's healthcare M+A environment, buyers are highly reliant on the QofE report to the point of weaponizing the report to gain leverage on a transaction and ultimately reduce the purchase price. Given these unusual times, I highly recommend completing a seller's QofE prior to going to market.
In my column, "'The Deal Killer': What to Know About Quality of Earnings," I explain that the benefits for a seller that takes this initiative and makes this investment are significant. I further state that it has become a "gamechanger" for sellers. Why?
The buyer will still conduct a seller's QofE at the buyer's expense. However, this QofE will go by quicker and with less disruptions to the transaction process if the seller has completed its own QofE. A seller that completes the QofE can use the insight into its company's financial shortcomings to address any accounting issues identified that could be leveraged against the seller during transaction negotiations. A seller's M+A advisor should be able to help their client avoid most of the challenges and frustrations that can come from a QofE.
6. Change of ownership
It's very easy to change the name of a company owner. For one reason or another, you might decide to put your spouse or child as the owner. No big deal, right? Depends on your plans to sell the company and the regulatory standards of your payers.
In the eyes of many licensing agencies, such as the Centers for Medicare & Medicaid Services (CMS), any "change of ownership" (CHOW) must be reported to these agencies. That's straightforward.
What you may not know is that CMS, as an example, has a rule preventing organizations from undergoing a CHOW more than once every 36 months. If you reported a CHOW 24 months ago, the sale of your company to a new owner would have to wait 12 months.
States often have their own set of regulations around the sale of an organization that could greatly affect how a healthcare transaction should be structured. In addition, every payor will have its own set of rules around the change of ownership, with most payors having preclosing notifications.
To better ensure a smooth sale, know what guidelines exist before you start the process. Your M+A advisor should help you understand the rules that will affect your business and its potential sale.
7. Inflated "add-backs"
During the financial valuation process, we at VERTESS calculate a seller's earnings before interest, taxes, depreciation, and amortization (EBITDA) as well as the adjusted EBITDA. Adjusted EBITDA removes expenses the seller has incurred as a business owner that the next owner will not likely incur, which are referred to as "add-backs." These might be a car payment, executive development coach, or membership at a business club. Adjusted EBITDA is often the basis for valuing the company.
Most buyers will agree with such standard add-backs, but if a seller adds items of a questionable nature that the buyer does not agree with, the purchase price can experience a substantial adjustment. It's important to understand each add-back that you list and be ready and able to support why it is an expense the future owner will not need to incur.
A seller might receive an initial offer that appears generous, but once add-backs are discredited, the price may not be what was anticipated.
8. Lack of communication
The M+A process is lengthy and can take many months — sometimes even a year or more. Effective communication is critical throughout a healthcare transaction, with the communication starting with how your company is represented to prospective buyers during introductions. It becomes more intense when negotiating an LOI and finally during closing. Breakdowns in communication can jeopardize a deal at any stage of a transaction.
Maintaining consistent, transparent communication throughout the due diligence process supports a smoother experience. Expectations should be made clear between the buyer and seller, better ensuring that their post-transaction priorities are aligned. This can help avoid future culture and transition shocks.
Enlisting the expertise of a knowledgeable healthcare M+A advisor to communicate the good, bad, and ugly between buyer and seller can help avoid or at least greatly reduce discomfort and allow each party to work comfortably together following the closing. It is important to know that one person is overseeing each step of the process, from introduction to integration.
9. Poor representation
We have worked with clients that have used their trusted lawyer/friend to represent them during the selling stage. What many of them found was doing so resulted in making the process painfully confusing, time-consuming, and frustrating, often causing the deal to fail.
Let's face it: Buyers are typically experienced and have gone through the M+A process multiple times. Sellers, most likely, have not, which is why they need a lawyer with experience in their area. The details and language involved in a healthcare M+A transaction are often complex. There is often common language and terms that an experienced healthcare M+A lawyer will know to look for. This helps ensure a seller's best interests are represented in the deal.
A knowledgeable lawyer will also not waste time on other common protections for the buyer. If your lawyer is arguing over language or points that are typically standard in a deal, not only are you wasting your time and money, but you may be frustrating and insulting the buyer.
Have someone in your corner who knows the legal pitfalls and vulnerabilities you will encounter during the final stages of a deal. This will help you receive the most protection while making sure you understand the nuances of the legal jargon that will affect the sale of your business.
10. All eggs in one basket
When it comes time to sell your company, you may be tempted to jump at the first prospective buyer that approaches you with a reasonable offer and good fit from a culture perspective. After all, doing so will seemingly reduce the length and stress of the selling process.
This approach can work well, but we have also seen it go south very quickly. The reason: If the buyer knows or believes it's in the driver's seat, it may pay what it thinks is a price likely to get a seller to bite and not necessarily what is fair and appropriate.
Without competition, a seller loses critical leverage and may be pressured into compromises. For example, we worked with a client approached by a buyer directly. This buyer offered an amazing multiple for his company. It was the first offer he received. On paper, the offer looked like a great deal. Unfortunately, once the LOI was signed, the buyer quickly pulled apart the financials and discounted so many items that the multiple was no longer desirable.
Fortunately, the seller was knowledgeable about what he deserved to receive for his company and pulled out of the deal. Unfortunately, he had not engaged in discussions with other prospective buyers, so he lacked alternative avenues to explore. He then needed to start over with us. Had we started the process together, we could have quickly pivoted to other interested buyers when the initial deal fell through.
Making the Best of the Challenging Healthcare Merger Process
The M+A statistics shared at the beginning of this column were not intended to discourage you from selling your company. Rather, these stats help paint a realistic picture of the marketplace. The good news is that with the proper preparation, open communication, knowledge of the transaction process, and support by a team of competent, skilled healthcare M+A advisors, you will greatly increase the likelihood of being in the minority of companies that achieve a successful merger.
To learn how the expert VERTESS healthcare M+A advisors can help you get to the transaction finish line, contact us today!
Bradley Smith ATP, CM&AA
For over 20 years I have held a number of significant executive positions including founding Lone Star Scooters, which offered medical equipment and franchise opportunities across the country, Lone Star Bio Medical, a diversified DME, pharmacy, health IT and home health care company, and BMS Consulting, where I have provided strategic analysis and M+A intermediary services to executives in the healthcare industry. In addition, I am a regular columnist for HomeCare magazine and HME News, where I focus on healthcare marketplace trends and innovative business strategies for the principals of healthcare companies.
At VERTESS, I am a Managing Director and Partner with considerable expertise in Private Equity Recapitalizations, HME/DME, Home Health Care, Hospice, Medical Devices, Health IT/Digital Health, Lab Services and related healthcare verticals in the US and internationally.
We can help you with more information on this and related topics. Contact us today!
Owners of healthcare companies are accustomed to creating financial value for their businesses by focusing on the traditional areas of scope of services, client/patient capacity, and revenue streams via reimbursement yield and patient volume.
While revenue growth and operational efficiency are key value drivers for a healthcare company, neither addresses a critical value factor known as company-specific risk (CSR). CSR, also referred to as unsystematic risk, can be understood as risk unique to a company or industry. Differences in CSR are one of the most significant reasons some healthcare firms get top dollar when sold, while others receive a fraction of their potential sale price.
Let's look at five ways healthcare business owners can increase their financial value by decreasing their CSR.
1. Create a fully developed, written business plan
Few small to medium-sized healthcare businesses create a business plan once they are no longer early-stage companies. Instead, they tend to rely on an informal, ad-hoc approach to planning that relies extensively, if not exclusively, on the activities of the business owner(s).
Taking the time to develop a written business plan at various stages of a company's history provides owners and employees the ability to discuss and create a roadmap that supports the owners' business strategy. A detailed business plan also decreases CSR by addressing issues such as:
Where is the business headed?
How will we get the business there?
How much will it cost us to get the business there?
What are competitors doing to keep us from getting there?
2. Establish an independent and engaged board of directors
Since most healthcare company owners are healthcare professionals who have learned how to be businesspeople through trial and error, they are often not accustomed to seeking advice from seasoned business professionals. That explains why some healthcare business owners believe that assembling a board or directors or advisory board will diminish their independence. However, board members can deliver significant value to business owners by sharing competitive insight, acting as a sounding board for new ideas, enhancing access to growth capital, strengthening company credibility, suggesting alliances, and more.
Company boards reduce CSR by providing strategy guidance, thought leadership, and hands-on experience. Viable businesses often have the support of a group of seasoned business professionals who have a genuine interest in the success of the company.
3. Develop a sustainable corporate culture
Many small to medium-sized healthcare companies have a corporate culture that mirrors the personality of the owner(s). As such, the culture may not be well-suited to capitalize on growth opportunities and may not foster a collaborative environment among disciplines and employees. Moreover, the culture may not actively and effectively develop future leaders throughout the company.
Effective corporate cultures help energize employees, attract new clients, improve the effectiveness of managers, and enhance company reputation. Developing a sustainable corporate culture reduces CSR by lessening the impact of high employee turnover, decreasing unethical behavior, and increasing positive employee interactions.
4. Set up an experienced and focused sales team
Few small to medium-sized healthcare companies have dedicated sales professionals on staff. Instead, they rely on generating business through the likes of referrals and company websites. While these are important for a company's growth, the addition of quality salespeople can be a difference maker. The right sales team can solidify relationships with patients/clients, gather critical feedback regarding the company's performance, and gauge and help a business respond to market trends. A quality sales team can reduce CSR by creating a pipeline of new patients/clients, reducing patient/client concentration, and enhancing barriers to competitive threats.
Why don't many small to medium-sized healthcare companies establish an experienced and focused sales team? Some healthcare providers are under the impression that governmental regulators frown on these kinds of activities. Others believe sales efforts are unprofessional in healthcare. Both perspectives are misguided. Larger healthcare companies almost always have a professional sales staff, which can make it difficult for smaller firms without a sales team of their own to remain competitive.
5. Create and adopt a marketing plan
A well-written marketing plan includes the duties and responsibilities of the marketing person or team, a detailed assessment of the target market, competitive analyses, and brand development, among other topics. A fully developed and adopted marketing plan helps reduce CSR by establishing and sharing knowledge of the company's target market and tactical plans to expand market share. Moreover, a marketing plan establishes a foundation for delivering the desired patient/client experience.
Some healthcare company owners believe that when a marketing plan is created, it will eventually collect dust on the shelf and never be reopened. What they fail to realize is that a functional marketing plan is never finalized. The plan should be treated as a living document that changes as the market environment and the company changes. The plan should also be regularly revisited, evaluated, and updated based upon factors including the success of marketing campaigns, identification of new marketing opportunities, and marketing efforts by competitors.
Learning the Value of Your Healthcare Company
Understanding CSR factors and how to mitigate them can significantly increase company value. To gain a better understanding of your CSR factors, learn about the value of your company, and find out ways you can potentially strengthen the value and performance of your healthcare business, reach out to me or any other member of the VERTESS team. We're help to help!
David Coit DBA, CVA, CVGA, CM&AA, CBEC, CAIM
I am a seasoned commercial and corporate finance professional with over 30 years of experience. As part of the VERTESS team, I provide clients with valuation, financial analysis, and consulting support. I have completed over 400 business valuations. Most of the valuation work I do at VERTESS is for healthcare companies such as behavioral healthcare, home healthcare, hospice care, substance use disorder treatment providers, physical therapy, physician practices, durable medical equipment companies, outpatient surgical centers, dental offices, and home sleep testing providers.
I hold certifications as a Certified Valuation Analyst (CVA), issued by the National Association of Certified Valuators and Analysts, Certified Value Growth Advisor (CVGA), issued by Corporate Value Metrics, Certified Merger & Acquisition Advisor (CM&AA), issued by the Alliance of Merger & Acquisition Advisors, and Certified Business Exit Consultant (CBEC), issued by Pinnacle Equity Solutions, and Certified Acquisition Integration Manager (CAIM), issued by Intista. Moreover, the topic of my doctoral dissertation was business valuation.
I earned a Doctorate in Business Administration from Walden University with a specialization in Corporate Finance (4.0 GPA), an MBA from Keller Graduate School of Management, and a BS in Economics from Northern Illinois University. I am a member of the Golden Key International Honor Society and Delta Mu Delta Honor Society.
Before joining VERTESS, I spent approximately 20 years in commercial finance, having worked in senior-level management positions at two Fortune 500 companies. During my commercial finance career, I analyzed the financial condition of thousands of companies and successfully sold over $2 billion in corporate debt to institutional buyers.
I am a former adjunct professor with 15 years of experience teaching corporate finance, securities analysis, business economics, and business planning to MBA candidates at two nationally recognized universities.
We can help you with more information on this and related topics. Contact us today!
Most successful companies reach points in their history where big decisions must be made that will determine whether these companies largely remain the same size and stay on their current course or undertake significant changes — and usually investments — that lead to a transformation in size and services. Successfully executing this transformation isn't typically easy and often introduces big risks to the viability of the company. For businesses that want to grow, taking risks is a necessity. Fortunately, business can also take steps to reduce the likelihood that these risks will backfire and potentially stifle growth or even cause financial harm.
In this column, I will discuss three types of companies — small, mid-sized, and large — and share key considerations for business owners and operators as they work to successfully move their companies up the growth ladder. Discussions of each company type will be accompanied by a real example of such a company that reached a significant growth turning point and the advice I provided or will be providing that can help turn risk into reward.
Smaller Companies
Let's start with a discussion of smaller companies, and we will define them as companies with revenue between $1 million and $20 million. These tend to be very service-forward companies that often cater to the whim of referral sources and are known in their communities as companies to go to when you want to work with somebody who cares.
That's not to say a larger company can't be a company that cares, but smaller companies tend to have that reputation. In addition, the competitive advantage and differentiator for a smaller company must be its service level — almost bar none. We are in an extremely mature industry that has been on the consolidation trail for a long time. This tells me that if you're a smaller company that wants to stay profitable, flourish, and grow, you need a service component that is your raison d'être.
I recently worked with a small(ish) home medical equipment (HME) company that specializes in diabetes care. It has a few branch locations. The company is known in its community as the company that will be there when push comes to shove. That's their best asset but also their worst detriment because they are known to be the go-to source for everything and anything.
This company recently decided to take on continuous glucose monitoring (CGM) as its next best product area of interest. The service line is being built by a few of the company's core staff members, and it is rapidly taking off. What this tells me is the company is ready to step outside the proverbial small "ma-and-pop" box and into a landscape where it will be able to achieve significant growth.
That's good news for the company, but it presents a big challenge. What they are contending with now is how to tell the community that the addition of this service line and its associated growth will require the company to pull back on being everything to the community all the time. The company still intends to help its customers with anything related to diabetes care because that is its area of specialty, which is supported by a pharmacy. But now the company will be focusing on the CGM line coupled with its CPAP business and other durable medical equipment-related items. That means changes are coming, including only providing one-off items within reason and needing to dropship items like a walker rather than personally deliver it. Alternatively, patients can drop by to pick up their equipment. It may also mean longer times between appointments for homebound CPAP patients and/or a need to deliver equipment and training remotely. And it means that for services that fall outside the company's wheelhouse, the business will refer customers to someone else.
One of the lessons learned for this small — and soon be a mid-sized — company is the importance of determining how to maintain a local feel without needing to be everything to everybody. That is requiring them to focus on the positives — the areas where they can excel as a business — and reduce or eliminate the negatives — the areas that do not make sense for the business. In other words, this company is cleaning up its house, making sure that what people see reflects the business in an accurate, positive way, and eliminating the nonprofitable products and business practices, with very occasional exception.
Mid-Sized Companies
Now let's move to mid-sized companies, which we'll say are those generating between $21 million and $100 million in revenue. They have many locations. They have good processes in place to support the business and growth, but now as they are scaling up and getting closer to becoming large companies, what they need is to become more consistent in the way they run their business.
What do I mean by this? For mid-sized companies, something that often gets overlooked is the notion of being centralized. This can be difficult because mid-sized companies have grown from the successful smaller companies that had a local feel and presence, but now with the larger contracts they have with insurance companies, these mid-sized company must be more consistent in the way they do their business across the enterprise. They must create "by rote" functions, to some extent. They must promote centralization of functions such as purchasing, for example. To further scale the company, non-routine or exception tasks should be reserved for leaders or higher skilled staff.
The challenge and opportunity here is how to achieve this consistency and continue growing without needing to add significant additional human resources that can cut into profitability. This points to the need for automation. Mid-sized companies must explore how to use automation and to begin exploring machine learning in ways they have not yet entertained.
Quickly emerging are the many companies offering services powered by machine learning. Mid-sized companies must start to look at these companies and their services as potential ways to continue to meet payer contract expectations and then be able to scale the company without needing to add extensive resources.
Consider that to handle orders that come in, mid-sized companies generally rely on people to process them. Sometimes that work is performed in-house; sometimes it's outsourced. But in either situation, it's a people-driven process. A person needs to go through the documentation with each order and find the chart note, the prescription (medical necessity form from the treating practitioner, and the other item-related documents. Then they need to electronically file these documents accordingly.
With machine learning, technology can do this work, with the solution essentially becoming the "fax wrangler." This doesn't eliminate the need for people. Rather, you take your really good processors and have them teach the machine what it needs to know and then have these people manage the machine and ensure the work is completed appropriately.
In a mid-sized company consulting engagement last year, one of the tasks I was charged with was coming up with a way to make more consistent use of their people. To do so, we centralized various responsibilities. For example, we created a centralized phone team. That was step one, and a valuable step that will help achieve consistency. What I find fascinating is a next step where the company would investigate how the use of machine learning may be able to reassign people on that phone team.
Let's say this phone team receives frequent questions about the status of a new order. Machine learning (also referred to as "digital experience" by some) should be able to proactively automate a text message to patients that confirms receipt of the order from their doctor, stating an update will follow within 48 hours. While this won't eliminate all calls about new orders, it should greatly reduce the number of calls that come in for order status and thus the number of people who need to answer these calls. In cases where automation is employed, companies have been able to reduce the number of inbound calls for order status by 75% or more.
The best places to start looking at where you should first work to incorporate machine learning are those aspects of your operations requiring the most human resource time, which are likely some of your largest cost centers. Once you've identified these pain point areas, determine what opportunities exist to introduce automation and eventually add machine learning to power this automation. This undertaking is one way to create a much easier and more consistent landscape for a mid-sized company to grow to the next level.
Large Companies
Now let’s discuss our final group: large companies with revenue greater than $100 million. These are businesses that are moving from being a regional player to a national player or a regional player moving into a new region. This growth is complicated because it often occurs through acquisitions, so now you are looking at melding different companies together. These companies have their own way of running their operations, with leaders who have had roles defined based on needs, personality, and demographics of a company. Following the acquisition, these leaders and managers are now being told that the way they have worked and the work they have done will need to change. Those can require difficult conversations and difficult changes.
What a large company needs to do is essentially look at each of the processes for the various companies now part of the larger entity and determine which ones perform the strongest and where large holes exist that need to be filled. For example, let's consider a company that has one contract that does not allow offshore billing and one contract that permits it. The company will want to look within its expanded operations to identify individuals who can champion these distinct efforts. Maybe Susie's company in Kentucky had a fantastic offshore company partner achieving great results. You might want to use Susie and her experience to champion the offshore billing efforts. For payers that do not permit offshore billing, you might find that Bobby's company in Rhode Island had impressive in-house billing performance, so he would champion that effort for the organization.
In larger companies, you typically have defined centers of excellence based on product mix and payer mix within each product. For example, you may have a large HME company with a center of excellence for urological and ostomy supplies and a separate center of excellence for CPAP and CPAP supplies. These centers of excellence are formed by larger companies dividing up the companies they've acquired first by their strengths (in revenue and collections), second by payer (contracts) that dictate how they are going to run their business, and third by product mix.
This brings me to a large client example and how this mindset would play out. One of my large clients recently finished a significant sized acquisition. But the post-acquisition transition is not going as well as they had hoped. Timely payments aren't as seamless as they had been previously because the companies haven't been merged well yet. People who are doing day-to-day work have been tasked with trying to merge the companies, but the work is just too much, and these people cannot focus on their daily tasks and simultaneously handle the merger tasks.
One recommendation for this large company is to assemble a dedicated mergers and acquisition transition team. If this large company is going to continue to pursue acquisitions, which I believe it will, now the company will have a dedicated team to handle merger-related functions, which would include creating centers of excellence.
An important caveat to using a transition team is the need to stay nimble and consider when growing the team would be worthwhile. Perhaps an acquisition necessitates the merging of software. If your transition team lacks a specialist in merging software, you will want to find this talent and add it to the team or use an outside contractor with this specific experience.
Once you have completed a merger, then a large company should further evaluate processes and determine what changes will help it get the biggest return on investment (ROI) based on payers and product mix. Do this by evaluating the best practices of each of the merged companies, including the original company, and determine the ROI from there.
Key Takeaways
I've covered a lot of information here, so I want to conclude by summarizing what I think are some of the key takeaways. For small companies, you must understand the nuances of going from ma and pa to the next stage where you are not and cannot be everything to everybody anymore. You must decide what you want to be "when you grow up." You still need to have a local feel, but inside your operation, your guts must be run much more efficiently.
When you get to the mid-size level, you need to rely on software to scale your company and find those people who will champion this cause. When you have the right people managing the optimal solutions that introduce automation, you will still be able to deliver an exceptional customer experience and achieve success. Lean on your heavy hitters when scaling your capabilities through automation and machine learning.
Finally, when you become a large company and are on an acquisition trail or you have completed an acquisition, you must understand which of the companies is better at payer and product mix integration. Then you must look at how you're going to fit in together as one team. A transition team that can effectively prioritize getting two distinct businesses combined will greatly help in that cause.
Regardless of your size, stay focused on your core competencies and best practices, then plan ahead and pivot as necessary to continue to flourish and profit in the ever-changing healthcare landscape.
Miriam Lieber President, Lieber Consulting LLC
Miriam Lieber is a principal consultant and trainer specializing in home healthcare revenue cycle management. Her extensive experience with Medicare and other third-party payers has brought her national recognition in the homecare industry. With over 25 years in the homecare field, Miriam has consulted with over 500 HME companies nationwide and is a featured author of many articles in the areas of operations management and leadership. She is also a nationally known speaker for many homecare trade associations. She can be reached at 818-692-1626.
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