In the business world, the concept of the "second bite of the apple" refers to a business owner retaining some ownership of their company (i.e., rollover equity) following a sale to a strategic partner and then the owner earning another payment when the strategic partner sells the company. Thus, the mergers and acquisitions (M&A) meaning of the "first bite of the apple" is when the owner initially sells the majority of their company to a strategic partner.
However, I would argue that defining the bites of the apple in this manner overlooks a lot of the details of the owner's journey to this point in the life of their business. Another way to look at these bites is that the first bite of the apple occurs when an owner starts their business. This bite can be bittersweet. It involves joy, worry, sadness, and the many difficulties that business owners typically will experience and endure on their ownership journey. The second bite of the apple is when the owner capitalizes on their hard work through a sale, leading to a more comfortable retirement or enabling the owner to pursue another venture — all because of the effort and hard work that went into building a successful first company.
To capitalize on the metaphors described and maximize the enjoyment of the second bite of the apple requires getting the first bite right. When starting a business, there are a number of decisions an owner will need to make outside of determining what services the company will provide. Let's look more closely at a few of the most important ones and what new business owners need to know about them. Note: While missteps concerning these decisions are not uncommon, owners that recognize and address their mistakes can better ensure their second bite is as sweet as it can be.
Debt
All new businesses take on debt. Be precise and strategic about how you take on this debt. Ensure the debt does not over leverage your business and can be paid even if revenue declines due to normal deviations. You do not want to compromise your ability to maintain credit and compromise your working capital. To elaborate further, if you rent a building or office space, one of the most important considerations is whether the cost fits your business model of expenses versus revenue.
When it becomes time to expand your company, do not overextend yourself financially. Follow the original expenses versus revenue model and ensure expenses remain an appropriate percentage of tracked revenue.
Accounting practices
Accounting practices are key to a successful business. Most new businesses may use some type of internal accounting process via QuickBooks and/or utilization of an office manager. Most businesses will also need to contract outside accounting services to track taxes, payroll, and other expenses. Maximizing tax deductions is important for a new business. Hiring the right accounting firm will ensure you properly track and document monthly profit and loss (P&L) and receive ongoing, proper counsel. Advice can include the best methods to save on taxes and track progress accurately. The ability to present accurate, complete data is important if you are audited by the IRS — and when it eventually becomes time to sell your business.
Clean financials are key to surviving buyer due diligence during an acquisition, and they are an essential element of a buyer defining your business attractive and a worthy investment. If cleaning up your financials requires too much work, this will turn many buyers away.
Personnel
One of the most important — if not the most important — steps business owners must take is hiring personnel. Owners need to find the right personnel and maintain strong employee relationships throughout the journey of running the business.
While one would hope that employees will be as devoted to a business and its success as an owner, achieving this is often unrealistic. Owners have much more to gain and lose. But owners will still want to work to develop employee loyalty to the company, which requires keeping employees engaged, excited to come to work every day, and feeling like they are part of something bigger than themselves.
Achieving these goals starts with transparency. Share the company's ongoing progress — good and bad — with employees. That means not just bring up performance when sales are down.
Make employees a bigger part of the business. Profit sharing is one great way to do so. It better ensures transparency, and when revenue grows, employees directly feel the impact of their work and the company's success beyond receiving a regular paycheck. ESOP companies — those with an employee stock ownership plan — have been extremely successful for this very reason.
Profit sharing also promotes tenure, which is extremely important in keeping quality staff for the long term. The better staff understand the business, the better they will be at performing their work and supporting the business and its growth.
Impacts on a Transaction
The decisions you make concerning debt, accounting, and personnel are just as critical to the start of your company as they are to its end when ownership is transferred. Let's jump to the moment where you're looking to sell your business or find a strategic partner. The first step you will want to take is to highlight your business performance. Owners often get focused on the products or services they provide and the value and benefits these deliver to consumers. However, if your business model and structure are not solid, a buyer is not going to want to acquire your company, or you will not receive what you believe to be a fair offer.
It's important to know that most transactions are debt free. Any debt you have, whether it be tied into your real estate, fleet, renovations, expansion projects, or any other area of operations, will be deducted from the purchase price. Some debt is not necessarily bad, but if it's based on risk and not normal working liabilities, you will be at a financial loss.
If your bookkeeping is not clean, you can expect a difficult transaction process and one that may never reach the finish line. Clean bookkeeping is not about the minimum you can get away with when filing your taxes. It's about convincing a buyer that your business is the perfect acquisition opportunity — one worthy of an investment and one that can be scaled appropriately so the strategic company or private equity investors will generate a return on the investment.
The most crucial test of whether you have achieved clean bookkeeping comes when you go under a letter of intent and the buyer starts the quality of earnings (QofE) report, which is performed by a third party. A QofE is always the immediate telltale on how appropriately you have run your business. For any business that keeps good bookkeeping, with invoices that can be matched with revenue, expenditures at what the market would expect, and no large list of add backs and personal expenses rolled into the company, the QofE should align with your true revenue, often described as adjusted 12-month trailing EBITDA. What is often revealed through a QofE is a reduction in EBITDA, with the third party determining problems with your true revenue. This risk is why it's imperative for business owners to have a proven accounting team handling a company's financials throughout the life of the company.
Finally, personnel is often a company's most valuable commodity. It is not only important to have a well-trained and loyal employee base, but you will want a second, third, and sometimes fourth person in command or capable of assuming command when transitioning ownership. If an owner wants to stay on board and roll over equity post-acquisition, then the number two or three person in charge may not be as important to a buyer. However, if an owner is looking to take a reduced role in the company or completely sell the company and step away, the owner is going to need to prove that the next people in the chain of command know as much about the business as the owner does and will remain just as committed to the business following completion of the transaction.
Find the key leaders in your organization. Teach them the business until you are at a place where you know you can go on vacation for weeks at a time and not need to worry about how the daily operations will run because you have full confidence in the people you have appointed to oversee the company in your absence. If you successfully reach this point, it will be easier to demonstrate to buyers that you have worked for many years to prepare for the transition of oversight and management and are confident that it has reached a level where you can step aside.
The Time to Think About the Value of Your Company Is Always
Many people do not think about the value of their business until they think about selling the company. But the value of your business will be predicated by how well you have run your business throughout its many years of operations.
While it may seem counterintuitive, you should think about the value of your company starting the day you launch your business and then never stop. Best practices, like those highlighted earlier, should be top of mind throughout your entire ownership journey. Otherwise, when you finally decide to pursue a transaction, you will likely find yourself spending a lot of time and money trying to clean up existing processes. Even if you are successful in cleaning these processes, a buyer will likely determine that the consistency you are hoping to show is deceiving. This can cost you offers and the value of offers, but it's simple to avoid if you start on the right track from day one (or as close to this as possible).
Speaking of value, how would an owner know the right time to maximize on that value through a transaction? The best time to sell a business or find a strategic partner is when the business is running on all cylinders. However, when business is performing great, this is usually when an owner thinks the least about selling. It's the time of ownership where running the company is perhaps the most fun, in part because of the tremendous profits. Why would an owner want to share this with anyone else (besides employees)?
To answer this question, look at the scenario from a buyer's perspective. A buyer will see the most value in a business when everything is clicking — margins are great, employees are happy, and there is plenty of current and future business. The worst time to try sell your business is when performance starts going downhill or when you are ready to retire and are unable or unwilling to be part of the next chapter of the company after it has been acquired. While the buyer may not want you to remain involved, many buyers like the option of keeping an owner engaged for at least a short period of time to maintain some continuity and help ensure a smoother transition.
By selling your business at the height of its performance, this will essentially guarantee you the best valuation multiple and will help you get through the acquisition process, which can take many months during which there may be some peaks and valleys in the financials. If you are already maximizing revenue when you decide to launch your sale, you should be able to weather any storms.
To help you get to the finish line that you want for your company, hire an experienced M&A firm familiar with your type of business. As your M&A advisor oversees the creation of your company's confidential information memorandum (CIM) and completion of its financial analysis, they will identify any inconsistencies and irregularities that may have occurred in your business. With this information, your advisor will help you determine what you need to do to address these potential red flags or ensure you explain these issues early in the transaction process. Being upfront demonstrates your commitment to full transparency with prospective buyers and will help you avoid having any "skeletons" in your closet discovered during due diligence.
If you have questions about anything in this column, want to learn whether the time is right for your company to consider sale, are interested in finding out more about the transaction process, or are interested in discussing anything else concerning the future of your company, reach out to our team of expert healthcare M&A advisors at VERTESS. We'd love to hear from you!
J. Blake Peart, RRT, CM&AA
I have had the opportunity of an extensive and diverse career in healthcare for over twenty years. In the past ten years, I have served as CEO for multiple hospitals of Fortune 500 companies and CEO for several large Ambulatory Surgery Centers. In addition, my operations and business development knowledge has allowed me to experience the entire M&A process from start to finish focusing primarily on private equity transactions. My history as both a CEO and clinician provides a unique perspective based on years of experience and empathy when working with business owners seeking M&A advice. My expertise is in Ambulatory Surgery Centers, Physician Practices, and independent hospital businesses. I am here to support healthcare business owners who select the M&A direction as one who has walked in their shoes. I know that every transaction is unique and tailored to a seller’s need in getting the best deal and providing a positive experience throughout the entire process.
We can help you with more information on this and related topics. Contact us today!
Preparing an ambulatory surgery center (ASC) for a sale is a worthwhile process for center owners regardless of whether they intend to sell their facility in the near future. The process examines an ASC from a potential buyer's perspective, generating tremendous insights into where an ASC is thriving (what a buyer would find attractive) and where it needs improvement (what a buyer would find troublesome). With this information, owners can undertake initiatives that would further strengthen the ASC's infrastructure and operations, likely leading to financial improvements and increased competitiveness while putting the center in a stronger position for an eventual sale.
The following are six key recommendations for how ASC owners can run a more successful center — recommendations that will also set owners up for a successful sale.
1. Think about growth from the start
When opening a new ASC, owners are typically hyper-focused on getting to the finish line so they can open the doors and start performing procedures. But at least some energy and resources should go toward building a strong business foundation. Doing so will not only help an ASC succeed, but it will become more attractive for investors.
Among the key steps owners should take early in the ASC's development include assembling business and supply teams with healthcare and preferably ASC experience who can keep owners current on performance, trends, and developments. Owners should ensure they or their administration carefully research software choices and revenue cycle management (RCM) service partners if they intend to outsource some or all of RCM. Also, prioritize ensuring processes are not duplicated and automation is fully leveraged wherever possible.
2. Develop a basic exit plan when you're developing the ASC
Another important step to take early in an ASC's history — and likely even before the ASC opens — is understanding the future exit plans of your physicians and business partners, even if it's many years away. Such alignment is essential early and only becomes more critical as owners approach their exit phase. When you choose physicians to work at your ASC, they must be willing to purchase equity in the center, be willing to work under the umbrella of a corporate entity, and be receptive to an eventual acquisition.
One of the biggest mistakes a physician-owner can make is selling their ASC when they are ready to retire, unless certain steps are taken in advance. These include keeping the business scalable and making the transfer of vendors, maintaining employee retention, and keeping a transferable payer structure top of mind.
Also, be careful not to have one or just a few physicians perform a majority of your cases unless you are confident that these physicians will buy in to an acquisition. This will be critical to a buyer's ability to acquire your center or become your strategic partner.
A key test when preparing your ASC for an acquisition is to assess what would happen if you took a vacation for 4 weeks. If the business would still run smoothly and continue to perform well financially, the center is likely in good shape for a sale. If a vacation of 4 weeks would cause significant harm to profitability and operations, this should be viewed as a red flag.
3. Take time to understand the business side of running an ASC
ASC owners cannot afford to be absent from the business side of the facility. A lack of engagement can lead to poor decisions that harm financial performance, hinder growth, and lead to a disappointing exit. Owners should take the time to understand critical concepts like acceptable accounts receivable ranges, bad debt, and key performance indicators, and the benchmarks for the costs of clinical and non-clinical staffing.
Owners would be wise to pay market salaries and distributions to themselves and their partners as anything above market is likely to be frowned upon by a prospective buyer and new partners.
When hiring staff, seek professionals who are likely to remain with the ASC following an acquisition and generally avoid hiring and promoting through nepotism unless the individuals are qualified and expected to remain on staff when there is a transfer of ownership.
Owners should understand and be involved in vendor contact negotiations to help achieve cost savings for their ASC.
Finally, if possible, owners should surround themselves with physician-owners and non-physician-owners who have been through acquisitions to help with understanding the process and what's required for success.
4. Conduct periodic self-audits to identify opportunities for improvement and growth
Don't develop an ASC that has a mentality of: "This is how we always have done it, so we are not going to change." Change is critical to success, both when change will correct a problem and when change will improve performance.
How do you discover what you should change? Conduct internal audits, and be proactive in preparing for surveys, such as those conducted by your state and accreditation organization. Provide continuing education for staff, have a thorough onboarding orientation process for new hires, and encourage team members to always speak up when they have suggestions or concerns (i.e., creating a "just culture"). Build a culture that protects your patients backed by policy and supported by best practices.
5. Prioritize treating patients, but don't lose sight of the business
Patient safety and quality of care are always first, but if you don't manage your expenses and pursue growth opportunities when they present themselves, you may end up with the best ASC that went bankrupt. And a bankrupt ASC can't help patients.
6. Step up sales preparation several years in advance
While planning the exit from your ASC should be an ongoing process, there is an optimal time to step up your preparation. When you believe you have about 5 years left of performing surgical procedures, begin to more seriously consider your exit and seek ways to further increase value and buyer interest in the center.
This is also a good time to list the center and consider taking on a strategic partner, especially if you're interested in maximizing your earnings from the sale through a rollover (i.e., equity roll).
The Sooner You Start Thinking Sale, the More Successful You Will Be
If you own an ASC and are thinking it's time to sell your facility or if you're wondering what you can be doing to best position your center for a sale, I'd welcome the opportunity to speak with you and talk through your opportunities. Please contact me using my information below. If you're interested in learning more about how to know when it is time to consider a strategic partner, I discussed this topic on the HST Pathways "This Week in Surgery Centers" podcast. You can listen to the episode on YouTube or through platforms like Apple Podcasts and Spotify.
J. Blake Peart RRT, CM&AA
I have had the opportunity of an extensive and diverse career in healthcare for over twenty years. In the past ten years, I have served as CEO for multiple hospitals of Fortune 500 companies and CEO for several large Ambulatory Surgery Centers. In addition, my operations and business development knowledge has allowed me to experience the entire M&A process from start to finish focusing primarily on private equity transactions. My history as both a CEO and clinician provides a unique perspective based on years of experience and empathy when working with business owners seeking M&A advice. My expertise is in Ambulatory Surgery Centers, Physician Practices, and independent hospital businesses. I am here to support healthcare business owners who select the M&A direction as one who has walked in their shoes. I know that every transaction is unique and tailored to a seller’s need in getting the best deal and providing a positive experience throughout the entire process.
We can help you with more information on this and related topics. Contact us today!
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