Volume 11, Issue 18, September 24, 2024

By: David Purinton, MBA, CM&AA

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:

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!

Email David Purinton or Call: (720) 626-2500

Volume 11, Issue 7, April 9, 2024

By: David Purinton

If you own a healthcare company, you are probably receiving inquiries from interested buyers. We view this as buyers marketing themselves to you. At VERTESS, we emphasize the importance of clients marketing their company to buyers as a key step in securing the eventual right buyer and partner.

With potential buyers coming and marketing to you, why should you put in the time and effort to market to potential buyers? 

To answer this question, it's helpful to take a step back and understand the current market for sellers and buyers, specifically focusing on the lower middle market. This market has the vast majority of operating companies since most companies have under $150 million in enterprise value, as the following chart represents:

Given the volume of potential targets, there are more investors in the lower middle market than you can probably imagine. The role of these investors (i.e., buyers) is generally to acquire founder-owned companies, professionalize them, scale them organically and inorganically, integrate them, and then sell the larger entity to the next investor. The acquired company scales up as it passes through the hands of various investors. 

These investors are financially motivated to market themselves as the appropriate buyer for your company. After all, they stand to make millions of dollars when their acquisition and subsequent growth and transaction strategies succeed. They're aggressively trying to find companies to buy and then execute these strategies.

Buyers view their outreach efforts as a sales cycle. They reach out to X number of business owners, hope that Y number of business owners will engage in discussions about selling their companies, and then the buyers weed out the companies they don't want to own, ultimately acquiring Z. In this sales cycle, buyers are essentially in control.

Owners who market to potential buyers take control of the sales cycle — one that's very similar to the cycle executed by buyers. Owners, usually supported by healthcare M+A advisors like those at VERTESS, reach out to X number of potential buyers and hope that Y number of buyers will engage in discussions about buying the company. Owners and their M+A advisors then weed out the buyers the owners don't want to sell to. The remaining options are engaged in discussions about the potential acquisition, ultimately concluding with the owner signing an agreement with Z. 

The Value of Control

Putting the power on your side of the equation matters. Consider the following reasons:

More likely to find the right fit. There are several thousand healthcare investors. Not everyone is going to be a good fit for your company. In fact, most will not. Similarly, a random buyer is not likely to magically be the right fit for you. When you control who you market your company to, you are more likely to market toward companies perceived as potential good fits.

Investors will know you're ready to sell if you're marketing to them. This increases interest and reduces risk. When buyers find potential targets by marketing to companies, the investors usually do not know how willing a seller is to sign a contract. Given the costs of due diligence, that lack of knowledge presents a six- or seven-figure risk.

However, when an owner markets to buyers, investors feel more comfortable spending money in due diligence since they know the owner is more likely to sign the contract at the end of the process. The appearance of an owner interested in at least considering a sale attracts a greater number of investors. 

Likelihood of better results. When you can identify multiple potential buyers who might be a good fit for your company, you put yourself in a position to leverage the interest in your asset to negotiate up valuation and terms. You cannot do this without leverage, as buyers aren't interested in spending more money to acquire your business unless they have competition — and competition perceived as legitimate and strong. 

Tips for Buyers

While we understand the strategy, we respectfully ask that you stop showing premium valuations in your letters of intent (LOI) to unrepresented sellers. You may not see it as a bait-and-switch tactic, but that's exactly what the seller experiences, and they leave the process believing the initial offer is still achievable with someone else. Even if re-trading has worked for you in the past, this is the kind of tactic that makes sellers skeptical of any buyer.

If you're looking for off-market deals, be prepared for the time and effort required to achieve a discount. First and foremost, develop the relationship before discussing valuation. If the seller asks for an indication of value too soon, you probably know it's not going to the finish line. Cut bait and move on until you find a potential seller willing to spend time forming a relationship with you that can eventually be leveraged into a sale.

If you haven't already done so, create a pre-LOI request list and open a data room. You should have about 75% confidence in a deal before signing an LOI. Submit an LOI that you would submit to an M+A advisory firm like VERTESS. Start with a cash deal you're prepared to execute, then add structure if there's a valuation gap. It's difficult to re-trade down.

Meet With Me at TCIV

I'll be attending TCIV East in Palm Beach Gardens, Florida, from April 15–17. If you will be attending this conference and are interested in meeting up to discuss the topics covered in this column or any other issue concerning M+A, please reach out to me using my contact information below.

Here to Help

If you're an owner thinking about selling, contact the M+A team at VERTESS. We're specialized healthcare advisors who help our clients with exit planning and executing that plan, including marketing directly to those buyers likely to be a good fit for your company and serious about executing an acquisition. We'll help you determine the right path forward for the sale of your business and then do much of the heavy lifting that typically ends with a successful transaction.

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!

Email David Purinton or Call: (720) 626-2500

Volume 9, Issue 24, November 21, 2022

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). And 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 document used to market your business to potential buyers. It may go by other names, including a pitch deck, investor deck, the "book," or confidential information presentation (CIP). The document is typically called a CIM when used in the sale of a mature business and a pitch deck for 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 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 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 data.

Moreover, organizing and presenting the data allows you to structure the narrative in ways that emphasize your company's strengths while providing explanation on potential weaknesses. You can tell your story 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.

This article taking a closer look at the importance and development of a CIM is written for two audiences: 1) sellers who are hiring a professional 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.

CIM Best Practices

Let's take a look at a few general CIM best practices before we discuss key components in a well-rounded CIM.

First, do not use a Word 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 PowerPoint.

Second, don't exaggerate or attempt to mislead a reader. An investor competent enough to buy your company is also competent enough to 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.

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 an M+A advisor, the coffee meeting isn't something you should need to do as the seller.

From here, the 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; and eventually, if all goes well, submit a letter of intent (LOI).

What To Include in Your CIM

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 industry.

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 overview, summarize the offering in a way any reader (buyer) can understand. Define your audience, which is often demographics of end users, the business types you sell to, 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:

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 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 did. 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, 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 leadership. 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 leadership team and want to know they're of pedigree.

Market. In many healthcare verticals, this is known or assumed, but 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 the market, also provide a clear picture of your audience. Who are they, and how many are in your market? How do you reach/communicate with them? What are your referral sources?

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 actually 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 canvass 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 discussing your competition in the CIM, you do not need to know and 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 trying to address and how your solution is similar, different, or whether that 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 discuss.

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 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 to the path toward growth can also be effective at demonstrating 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. 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. 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. I'll write a future article on how to develop metrics for your company and why that matters in an M+A transaction. If you do have metrics, the key is to compare yours to industry norms. Common metrics in healthcare businesses include prior authorization vs. claims collected, census, inventory turnover, and rounding, so you should be able to identify the benchmarks (an M+A advisor will help with this as well). If you have substantial variance from the 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 Confidential Information Memorandum

Developing an informative and effective 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 advisor, but 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 and interaction (and impression) a buyer will have with you and your company, it's likely in your best interests to hire an M+A advisor and task them with taking the lead on 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 buyers a starting point for the "coffee meetings."

Volume 8, Issue 15, October 5, 2021

I recently joined VERTESS as a managing director. I'll be providing merger and acquisition (M+A) and consulting services primarily to the behavioral health and substance use disorder (SUD) treatment markets. Like many of my new colleagues, I previously owned and operated a company in the space I will be working in for VERTESS. But that's not all: I also have firsthand, personal experience with substance misuse.

In this column, I'll share a little about this journey with you, how it motivated me to open my company, and several of the key lessons I learned from the sales process.

Personal Background

After years of failed attempts to stop drinking — and my own bias toward Alcoholics Anonymous, which kept me out of the rooms during those years — my family held an intervention for me in 2009. This resulted in a plane ride to Denver and a visit to a residential treatment program. I knew nothing of what the experience would be like but quickly realized that I was going to be in a one-year, behavioral modification program.

During that year, I never met with a therapist or generated the recovery capital that would be necessary to support me in the difficult years ahead following treatment. After completing the program, I found out that my family could not find a clinical treatment facility that would cost them less than $30,000 for a single month of care. They did the best they could without an understanding of the SUD treatment industry, insurance requirements, and admissions criteria. They sent me to a low-cost behavioral modification program because they could not afford a clinical program but needed to help me get into a safe place.

The Accessibility Challenge

After my experience, I became somewhat obsessed with accessible treatment and began consulting with residential programs a few years later. As a proponent of the parity initiatives discussed on Capitol Hill, I was disappointed when the passage of the Affordable Care Act ignited a series of lawsuits against providers who fraudulently manipulated insurance reimbursements to line their own pockets.

Furthering my disappointment in the industry was the lack of appropriations to states’ Medicaid budgets for inpatient and residential reimbursements. In Colorado, where I was living, Medicaid appropriations dried up for inpatient and residential care after the closure of the largest facility in Colorado, which mismanaged finances and operations to the point of insolvency.

Accessible care has advanced substantially over the past several years but still faces significant headwinds. In 2019, legislatures said that there should be enough beds in the country to support the demand for clinical treatment. However, there were not sufficient affordable and “attractive” beds. Those beds offered at an accessible price point were often behavioral modification or homeless-oriented programs, which all but those in dire need will not likely access. Without affordable and attractive options, people are less likely to get the support they need and more likely to continue using their substance(s) of choice.

Co-Founding Spero Recovery

Along with a treatment veteran and clinician, I started Spero Recovery with the intention of providing residential drug and alcohol care at a fraction of the national average cost. I wanted to create the type of environment I would have wanted to find back in 2009 and at a price point I could have afforded. My co-founders drew up programming plans and systems and began marketing the new program to other providers. Meanwhile, I secured real estate, funding, developed the IT systems, and managed financial operations. Before our intended opening, we had so many people calling us for admissions that we decided to move our opening date up by two months.

One difficultly of providing SUD treatment is the fixed costs of staffing. You must invest ahead of the curve, knowing you are spending significant capital that will not be returned until you can maintain a decent census. About three months after opening, I began analyzing burn rates almost nightly in fear that we were not capitalized sufficiently to last through the period of cash flow losses. But we survived our first year of operations, improved the program, and positioned ourselves for growth.

Around the time we were finding traction, COVID-19 precautions resulted in shelter-in-place orders. Not knowing what would result, we thought we would lose our program before we even had the chance to scale it. We were wrong. With job losses and substance misuse rates increasing from the pandemic, more people than ever were seeking treatment and required financially accessible care if they did not have COBRA insurance coverage. In fact, we remained at 100% occupancy with a paid waitlist since the onset of the pandemic in March 2020. Leadership can take a toll on someone who isn’t prepared to wear a target from disgruntled employees and skeptical onlookers, deal with sleepless nights, and work most weekends. One co-founder required a leave of absence to recover from the stress of scaling a business from $0 to more than $2.5 million in annual revenue in only two years. The other co-founder was only involved in operations part-time, leaving me to lead the entire organization without their support. I decided to sell Spero Recovery to an organization that had sufficient senior leadership to continue scaling it into a national program, but I made a mistake along the way: I first sold it to a tangential organization with unaligned cultures and values. As the interim CFO of the buying company, I decided to divest Spero Recovery to an independent sponsor who was well-known in the industry for practicing the principles of recovery in all his affairs. He was the right fit to scale Spero Recovery to a national program.

Lessons Learned From the Sale

If I had to do it all over, I would have built the organization much differently and transacted it differently as well. I learned the following five invaluable lessons in the sale process that may be relevant to other sellers.

Lesson 1: Culture Eats Strategy for Lunch

The idiom is so cliché that it has become white noise but remember that a cliché has a lot of truth in it. Prior to co-founding Spero Recovery, I was an M+A advisor at an investment bank, equipped with an MBA and a head full of financial knowledge. But I lacked wisdom. I had never seen what post-merger integration looked like or checked to see if employees were happy following the acquisition. Turns out, oftentimes accretion does not occur because integrating cultures poses too significant a challenge. Spero Recovery was fortunate to have a CEO who was more interested in the mission than his own personal return, but most companies do not enjoy that kind of relationship with an owner.

Lesson 2: Hire an Advisor

I had several years of M+A experience before Spero Recovery, so I thought I would be able to handle the transaction without hiring an outsourced advisor. The problem wasn’t my lack of knowledge, motivation, or negotiating skills. Rather, it was that Spero Recovery was my baby. At times during the sale process, I was too emotionally connected to the deal to make the most rational decisions. When I processed decisions and conversations with my colleagues, I noticed significant bias from them as well. Furthermore, I was also managing the organization while running the M+A process and was unable to respond as quickly to targets, nor was I able to give sufficient attention to Spero Recovery. It was less about a lack of skill and more about bandwidth and emotions.

Lesson 3: Dig In Your Heels

This was an area where I succeeded. There were certain deal points on which I would not compromise; others were not mandatory. Knowing that most sales processes will result in negotiations, I needed to hold my ground from the start on certain issues.

Lesson 4: Don’t Pick the Fruit Before It’s Ripe

Spero Recovery has tranches of fixed expenses that grow with scale but, like many residential treatment organizations, has significant economies of scale. The company was on the precipice of entering a new tranche of scale and would have experienced accretion from the associated investments within a year. I knew I was picking the fruit before it was fully ripe (selling before it could yield a higher valuation) and left enterprise value on the table by selling when I did. I had reasons to transfer it to the buyer of choice, but I have often questioned the decision to sell the business a year early.

Lesson 5: Celebrate

Part of celebrating the sale was handing a check to each of my employees after it was consummated. Sharing the celebration with my team was the highlight of the entire transaction process.

Here to Help

If you're ready to sell your company or contemplating a sale down the road, I'd welcome the opportunity to speak with you. As I learned from my experience with Spero Recovery, working with an advisor, whether it's VERTESS or another qualified healthcare M+A advisory firm, is one of the best decisions you can make for your business. If you're not doing everything you can to prepare for and execute a sale, you're doing yourself, your company, your staff, and your clients a disserve and almost certainly leaving value on the table.

Volume 7 Issue 5, March 3, 2020

By David Coit, DBA, CVA, CVGA, CM&AA and Hilsman Knight, CM&AA

The healthcare industry is continually in flux. Business owners and operators of urgent care centers (UCCs) are constantly experiencing changing regulatory guidelines and suppressing reimbursement from payors. These unpreventable changes and a demanding environment may lead owners to seek monetization of their assets. For those UCC owners considering selling, there's good news: The marketplace is currently hungry for your companies and buyers are eagerly gobbling up well-performing UCCs.

Owners of a UCC have the advantage of running businesses that are relied upon by other companies in the healthcare sector. Buyers see the advantage of owning and operating multiple locations and leveraging their current relationships to further extract value. As such, this is an excellent time to sell if you're looking to receive a premium price.

Recent Market Developments

Over the past several years, UCCs have rapidly emerged as an efficient way for patients to access specific healthcare needs. This has caused their popularity to grow, with centers emerging across the country in urban and rural areas. Furthermore, UCCs with multiple locations have developed synergistic value with other regional emergency healthcare providers. This has created a spoke-and-wheel-like model to help manage the continuum of care. Patients with minor, non-emergency services are taken care of quickly in UCCs, while more severe cases can be transferred out to freestanding emergency rooms (ERs), micro hospitals, and hospital emergency departments. In a relatively short amount of time, UCCs made themselves an integral part of the healthcare system.

Moreover, during the past five years, a shortage of primary care physicians (PCPs) coupled with rising costs and ER wait times stimulated even greater demand for UCCs to provide noncritical care. As such, the UCC industry has enjoyed 6.1% annual growth over this period, according to IBISWorld.

Industry at a Glance

There are about 4,700 UCCs in the United States. They generate combined annual revenues of $27.8 billion and profits of $5.7 billion. Referrals to UCCs come from hospitals, PCPs, orthopedic surgery providers, and otolaryngology (ENT) physicians, among others. A UCC's average payor mix is approximately 55% private insurance, 17% Medicare, 10% out-of-pocket payments, 5% Medicaid, 5% workers' compensation, 4% other government, and 4% other. The 10 largest UCC chains only own 10% of the total number of UCCs. As such, the industry remains highly fragmented.

Industry Outlook

The industry will continue growing over the next several years as a result of:

Overall, revenue is expected to grow an annualized 2.5% over the next 4-5 years to reach $31.4 billion in combined annual revenues.

Market Factors to Consider

If you're thinking of selling your UCC, you should know the following:

Buyers' Concerns

Smart buyers weigh risks versus rewards when considering the purchase of a company. Some of the perceived risks in the UCC industry are as follows:

Buyers' Rewards

Buyers are looking for rewards or upsides from their purchase of UCCs. Much of the upside will come from industry market conditions, such as:

What Buyers Are Looking For

In our experience, the most important feature buyers are looking for when pursuing UCCs is profitable growth. Buyers want to know that they can take what you have created and build on it. In their risk/reward analysis, buyers want to see that your strengths far outweigh your weaknesses. Most buyers have a checklist mentality, where they'll be looking to see that you have at least some of the following attributes:

How Much Will Buyers Pay (Market Multiples)?

Buyers typically go through their risk/reward analysis and come up with an offering purchase price. The offering price is usually based on a multiple of normalized or adjusted EBITDA.

EBITDA adjustments include non-recurring expenses, such as one-time legal fees; discretionary expenses, such as charitable contributions; and owner-related personal expenses, such as excess owners' salaries and auto leases.

Market multiples refer to the estimated purchase price relative to EBITDA. The typical range of market multiples for small- and medium-sized UCCs is 3.5x-8.5x EBITDA, while large-sized UCCs may see 9.0x-12.0x multiples. Where a particular provider falls within the range is based on quantitative factors, such as historical and projected financial performance, and qualitative factors as highlighted above in the "What Buyers Are Looking For" section. Moreover, size matters, as larger revenue UCCs tend to attract more buyers than smaller providers.

The following are estimated market multiples for UCCs by revenue, assuming positive qualities related to the "What Buyers Are Looking For" section above:

Note that there are outlier market multiples in unique merger and acquisition transactions where optimal buyer/seller synergies push valuations above the norm. Moreover, market multiples change over time depending on the overall economy, regulatory and reimbursement modifications, and industry trends.

Using market multiples is a good way to estimate the value of a company. It is most often accompanied by the use of a discounted cash flow approach. The discounted cash flow approach estimates the value of a company by calculating the future cash flows expected from the company and putting the future cash flows into today's dollars. However, the market multiples approach provides a reasonable shortcut for estimating the value of a company.

What About My Company's Debt?

The market multiples above are used to determine the equity value of companies, not the enterprise value. Most small businesses are sold debt-free, which means buyers assume that all of the company's debts (not to be confused with non-debt current liabilities) will be paid off by the seller at the time of closing. There are occasions, however, where a buyer wishes to assume the debt of the company as a way to finance part of the purchase price.

About VERTESS

VERTESS is the advisor of choice for many UCC business owners because of our track record of success and deep industry expertise. You should be speaking with an advisor at least annually to understand the market and your options.

VERTESS was formed by a visionary group of results-oriented professionals as an alternative to traditional merger and acquisition firms and investment banks. We focus primarily on your personal and professional goals, and we help facilitate transactions that make sense to you for the long term. Every owner of every company has different motivating factors for why they want to sell. Some owners decide to sell for liquidity purposes, especially when most of their net worth is tied up in their company, while others sell because they are increasingly concerned about the future viability of their company. Another reason owners might decide to sell is they feel it's time for a change, so they seek outside partnerships with investors and industry experts. All reasons have their own validity, and VERTESS takes them into consideration. We guarantee integrity, confidentiality, and a commitment to the best outcome for you, your company, and your family.

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