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.
We can help you with more information on this and related topics. Contact us today!
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!
The Corporate Transparency Act (CTA) went into effect on Jan. 1, 2024. This federal reporting requirement affects millions of U.S. businesses, and non-compliance with the statute can lead to serious penalties.
To gain a better understanding of CTA, whether and how it may affect you, and what steps you should take, read on.
Corporate Transparency Act
The impetus for enacting the CTA was the federal government, specifically the Financial Crimes Enforcement Network, wanting to gain greater transparency into holding companies either owned or operated by foreign investors. We have millions of business entities in the United States running diverse operations across every industry. For many of these businesses, the federal government lacks insight into who owns them, where ownership and operations money comes from, and whether there are illegal activities stemming from foreign involvement in ownership and operations. CTA is intended to help clarify ownership of certain types of entities to better ensure transparency into who owns and operates businesses.
From a high-level perspective, what's important to know about CTA is it applies to every business owner. Whether you're in healthcare or any other industry, if you currently own or operate an entity or planning to form a new entity for any venture, CTA applies to you. With that said, for most business owners, CTA will not be a significant issue of concern. For smaller entities, like "mom-and-pop" companies, achieving compliance will largely require submitting a simple ownership report. For mid-market companies with regional operations that have different layers of ownership with holding companies, CTA should also not be a burden. It's possible these entities will meet one of the 20-plus identified exemptions, which would eliminate the requirement to report. Even if individual ownership in a holding company doesn't meet an exemption, the same process for the mom-and-pops would apply here: submit ownership and management information to meet the requirement.
Where CTA may cause some consternation is for larger funds or funds that include foreign investment. If such entities do not meet an exemption, they may need to disclose ownership. In some instances, this may be a very unwelcome development, such as when operators do not want to disclose ownership for reasons like estate planning or litigation. As organizations get larger, reporting requirements can become more complicated and unwanted.
For companies formed before Jan. 1, 2024, the initial ownership report is due no later than Jan. 1, 2025. Entities formed in 2024 must submit their initial report within 90 calendar days of the date the entity is created or registered.
CTA reporting requirements are likely to affect businesses in a similar way to Paycheck Protection Program (PPP) loans and related pandemic relief programs. As businesses are going through and conducting transactions, CTA is largely going to be another box that needs to be checked. It's probably not going to require much work for or apply to most businesses. But in some scenarios, it's going to be difficult and feel intrusive. The anonymity that was once afforded via entity formations is going away, and unless you meet an exemption, you must disclose the information outlined under the CTA.
What Business Owners Should Do
With CTA now in effect, the first step business owners should take is to determine whether their current operations or entities qualify for disclosure. The statute itself, what must be disclosed, and what qualifies for an exemption is complex, which is why owners should turn to an expert for help. CTA expertise will largely come from one of two sources: legal counsel or a CPA. On the latter, many CPAs are aware of this process and the requirements because they're involved with entity formations.
The next step would concern those owners currently expanding operations, such as by setting up new entities in different locations/jurisdictions or entering into joint-venture agreements with other entities. These owners would need to move quickly to determine whether they are required to disclose ownership because of the shorter reporting timeline noted above.
With that said, business owners would be wise not to delve into the statute themselves. It's confusing, and it can be difficult to determine when an entity is eligible for an exemption. An advisor knowledgeable on CTA should ask a list of questions that generates the information needed to determine whether disclosure is necessary.
What business owners should also not do is ignore the CTA or try to feign ignorance about the new requirements. Willfully not filing ownership documentation can be considered a criminal act.
To summarize: CTA is an important new law for business owners. It affects all owners, so if you own a healthcare business or any other business, you need to figure out how CTA affects you. Work with an advisor to determine your responsibilities. If you try to intentionally ignore the law, expect repercussions.
Bradley M. Smith ATP, CM&AA
Managing Director/Partner
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 within the US and internationally.
We can help you with more information on this and related topics. Contact us today!
Today I want to talk to you about quality of earnings (QofE or QoE). I want to focus on this single concept because it's become one of the reasons — if not the leading reason — why healthcare transactions go sideways.
Before I get further into this discussion, I thought it would be helpful to define QofE. Investopedia does a good job explaining the concept, with the publication stating, "A company's QofE is revealed by dismissing any anomalies, accounting tricks, or one-time events that may skew the real bottom-line numbers on performance. Once these are removed, the earnings that are derived from higher sales or lower costs can be seen clearly." The publication goes on to note that the more closely companies follow generally accepted accounting principles (GAAP), the higher its QofE will likely be.
QofE reports are a useful tool banks are increasingly requiring for lending. The reason banks want this deep dive performed is to gain a better understanding of the businesses — and the financial performance of those businesses — they're lending to. The likes of higher interest rates and other factors are injecting additional risk into transactions, so banks want more certainty before they grant access to financing. A QofE report provides that higher level of certainty about a company's financial performance.
QofEs are useful tools for healthcare sellers and buyers as well, so how have they become so problematic in transactions? What's important to understand is that the QofE report generated by one accounting firm can differ from another. There's so much data and information analyzed to produce the QofE report, which lends itself to different levels of interpretation and/or different factors considered for a QofE. When firms are producing a QofE report, it's not unusual — and one could argue only natural — to see them take an approach that favors their clients.
What's happening is we're seeing QofE reports sometimes weaponized by private equity groups (PEGs) and increasingly weaponized by strategic buyers to retrade deals to gain a better acquisition price. How this typically happens is once a seller and their company is under an exclusive letter of intent (LOI) with a buyer, that buyer will then pay for a QofE during the due diligence period. The cost of a QofE can generally run anywhere from $50,000 to $250,000, depending on the firm conducting the analysis. After the QofE report is generated, the buyer then uses the information from the report to try to secure the lower acquisition price.
This strategy also involves tiring out the seller. To put together a QofE, the accounting firm requires substantial amounts of data — to the point that it can feel invasive while also taking a considerable amount of the seller's time and resources. On average, the creation of a QofE adds an extra month of due diligence to a transaction.
After the seller has been bombarded with excessive amounts of due diligence, the buyer comes back to the seller, QofE report in hand, to state there is a material deficit in the seller's EBITDA. Any pushback by the seller is typically met with a response along the lines of "the numbers are what the numbers are." The buyer then lowers their initial offer from the LOI to reflect the QofE findings and thus what the buyer argues is a more "accurate" price.
These "bad actor" PEGs/strategic buyers know going into the LOI that the seller's EBITDA (i.e., earnings) will not hold up to the scrutiny of the QofE and are thus relying on the resulting analysis and report to lower the price. The seller now must decide whether to move forward at a lower price or back out of the transaction, thus essentially wasting all the time and work they have put into the deal. It's a "rock-and-a-hard-place" situation. Unfortunately, I have seen this happen time after time when sellers accept unsolicited offers without representation from a healthcare M+A advisor.
A Good Offense is the Best Defense
What can sellers do to avoid ending up in this situation? I want to reiterate that the QofE is subjective and can be debated or changed. This is something most sellers do not know. That's why sellers should strongly consider having a QofE performed on their business. An experienced healthcare M+A advisor knows what firms can help their seller clients secure a QofE. Generating QofE reports typically falls beyond an average CPA's capabilities.
For a majority of VERTESS' deals, and essentially always for larger clients, we're working with our seller clients to get those QofE reports created. The benefits of taking the initiative and making this investment are significant. In fact, I'd say it's become a gamechanger for sellers.
Initially, that report provides great insight into a company's financial shortcomings. If completed far enough in advance of bringing a company to market, a seller will have time to change and correct accounting deficiencies and irregularities that could be leveraged against the seller during negotiations with a buyer. Thanks to forecasting and modeling, a seller's advisor can help a seller preemptively alleviate most of the pain that can come from a QofE. By getting in front of and addressing any problems ahead of going to market, we typically avoid encountering the kinds of issues with accounting that can cause a deal to fall through.
It might sound counterintuitive, but when we bring a company to market with a QofE report in hand, this makes the seller more appealing to buyers. While this report hamstrings the ability for a buyer to leverage a QofE of their own against a seller, it's important to understand that the top priority for most buyers — a majority of whom are good people — is to get a good deal done. Receiving a completed QofE from a seller provides greater certainty about a deal since an accounting firm has already completed the deeper financial dive. This QofE also helps a buyer make a more appropriate and fairer offer for the company.
To better understand why buyers appreciate when a seller gets their own QofE, consider this scenario where a buyer does not receive a seller's QofE: A buyer allocates significant time and resources researching a company, makes an offer, spends more time getting the company they're interested in acquiring under an LOI, and then proceeds with arranging for the QofE. That's a big risk for the buyer because the QofE could reveal the buyer made an offer that requires a significant change to the offer price — one that may lead to a seller backing out of the transaction. The QofE may reveal such significant accounting issues and deficiencies that the buyer loses interest in the acquisition opportunity. Now the buyer not only misses out on an acquisition, but it has also lost the money spent on the QofE on top of significant wasted time and resources.
It's also important to understand that buyers will likely still proceed with getting a QofE completed even if a seller presents a report of their own. This is just a natural part of due diligence. Once the buyer receives the QofE report, it's commonplace to see the two firms that developed the "same" QofE — one for the seller, one for the buyer — to review one another's reports and then discuss and debate the findings. If a seller lacks their own QofE, it becomes much more difficult to challenge the information from a buyer's QofE report.
Key Takeaway: Strongly Consider Getting a Quality of Earnings Report
While not every seller needs to invest in a QofE, QofE reports are becoming an increasingly important aspect of healthcare M+A transactions, especially those involving larger transactions. The cost of receiving a QofE is not cheap, but it typically delivers significant return on investment for a seller. A QofE helps a seller identify opportunities for accounting improvements, makes a seller's company more appealing to buyers, keeps bad actors (i.e., those looking to take advantage of sellers lacking deep insight into their financials) at bay, generally leads to better offers, and ultimately contributes to more successful transactions.
If you are interested in learning more about how to obtain a proper QofE for your company or discuss other ways we might be able to assist you as you prepare your company for a transaction, please reach out to our team at VERTESS!
By Bradley Smith, ATP, CM&AA
Volume 3 Issue 22, October 25, 2016
Several years ago, DME competitive bidding was instituted by Medicare and the impact has been dramatic. Many smaller DMEs that could not successfully compete sold their assets, restructured their business, or simply closed their doors.
Other DME companies, however, saw an opportunity to be exploited. In my national DME merger and acquisition practice, I've seen a number of success stories of companies that have both survived and thrived in this increasingly competitive environment. Here's what they did:
1. They ruthlessly assessed the healthcare marketplace.
Successful DME entrepreneurs realized quickly that healthcare is now being shaped by economics, managed care, rapid innovation, strongly-stated customer preferences, digital marketing, and new direct access to DME products. They then made a commitment to adapt to these changes rather than pretend they weren't taking place.
2. They partnered with investors and capital.
Successful DME entrepreneurs scrapped the traditional "go it alone" strategy in favor of a new affiliation model, where competitors actively partner with one another in selected areas. They also brought in new investors, especially private equity groups (PEGs) that had abundant financial resources and saw an opportunity for disruptive innovation.
3. They adopted a millennial perspective.
Rather than the lethargic approach characteristic of many DME operators from the Baby Boomer generation, successful DME entrepreneurs have acted with a sense of urgency and agility that's characteristic of high-tech firms, where most of the key employees are from the millennial generation.
4. They sharpened their strategic clarity.
Traditional DME companies often had a general sense of their strategic goals rather than a precise understanding of what would be necessary to succeed in a changed and changing marketplace. The most successful DME entrepreneurs set aside their historic biases, systematically assessed their risk/benefits, identified the resources necessary to succeed, and then aligned those resources strategically prior to taking action.
5. They focused on precise execution.
In the past, DME companies often had good, but general plans for the future. However, few were able or willing to execute those plans with precision.
The DME companies that thrived (and there are quite a few) acted with conviction, evaluated their results, and made course corrections in order to keep on growing and diversifying. They were and are ambitious, in the best sense of that word.
6. They targeted their offerings.
Traditional DME companies tended to offer a full line of products, regardless of whether those products were profitable or in high demand. By contrast, today's progressive DME companies tend to "drill down to core offerings," all the while paying attention to cross-selling opportunities. This allows them to quickly eliminate underperforming products, thereby increasing profitability.
7. They've learned to learn quickly.
In order to take the actions described above, successful DME companies have learning quickly from their mistakes and successes alike, incorporating those lessons into new offerings and new initiatives. Mostly, they've learned that the DME market is shifting, like the rest of the healthcare industry, to a value-based, outcome-measured model.
8. They've become fanatical about measurement.
Funding entities and payers, whether public institutions, managed care organizations (MCOs), commercial insurance, or even consumers who pay cash, want to know about observable outcomes and value in terms of their healthcare. Healthcare companies that can't deliver these outcomes and value - or can't communicate them effectively - simply can't compete in this rapidly-changing market.
COMMITTED TO CONSTANT IMPROVEMENT?
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