Few dentists are aware of the market value of their dental practice. Moreover, most don’t understand how industry experts (e.g., accountants, bankers, dental practice brokers, and buyers) determine the value of dental practices.

In this column, VERTESS will be helping you better understand how the value of a dental practice is determined. Let’s begin with some of the key performance indicators that buyers look for when evaluating dental practices.

Dental Practice Valuation

Dental Revenue

Buyers like to see growing revenues as it indicates future value growth opportunities. As such, buyers are willing to pay a premium for practices with growing revenues, as long as the growth is sustainable into the future. Stable growth practices will be valued in the mid-range of market pricing, while negative growth practices will be valued at a discount. Buyers won’t usually pay for unproven growth, where sellers boast that their practice has significant growth potential but they haven’t taken advantage of it.

Dental Practice Profitability and cash flow

  Buyers seek a return on investment commensurate to the riskiness of the investment. The five-year industry average net income, as a percentage of revenue, was 9.10%. Similarly, the five-year industry average of earnings before interest, taxes, depreciation, and amortization (EBITDA, which is similar to cash flow for companies with low annual capital expenditures) was 18.30%. EBITDA is often used as a surrogate of cash flow. Cash flow is the most important indicator of value in the eyes of buyers.

Fixed expenses vs variable expenses

 Fixed expenses, such as rent, utilities, labor costs, and insurance, don’t change based on a practice's production level. As such, the lower the percentage of fixed cost relative to variable cost, the greater the potential for higher cash flow as revenues grow. Also, practices with lower relative fixed expenses are less risky than practices with high relative fixed expenses. As a benchmark, fixed expenses should be less than 60% of all expenses.

Average profit per patient

 Astute owners and senior practice staff should be aware of the profitability of each service provided to each patient. High-profit services and high-profit patients should be prioritized to maximize profits. Moreover, since the profitability of new patients usually exceeds existing patients, onboarding new patients must be a high priority. Buyers will be keenly interested in the total number of patients, the number of new patients, and existing patient tenure/attrition.

Collections

 Buyers are interested in a practice's collection rate. A good rule of thumb is a collection rate of 98% of all money owed to the office after insurance adjustments and other discounts.

Staff compensation and turnover

 The five-year industry average for salaries and wages (not including owner compensation) is 20.6% of revenue and 16.7% for 2020. While the percentage of salaries and wages is important, so is employee turnover. Although it’s typical that tenured employees received higher compensation than newer employees, tenured employees often create more value because they have adapted to an organization's culture and possess a strong understanding of the policies and processes, which results in increased productivity (i.e., tribal knowledge).

How Buyers Value a Dental Practice

Buyers look at the qualitative and quantitative aspects of a particular practice in determining value. The qualitative aspects of a practice impact the quantitative results of the practice’s performance.

The two most widely used valuation methods for valuing dental practices are the market approach and the income approach, either capitalization of earnings or discounted cash flow.

Market Approach

Income Approach

The income-based methods factor tangible and intangible assets of a practice, then apply a rate of return to the earnings stream. These dental practice valuation formulas work best for practices that have a strong patient base and proven track record of solid revenue and growth. Buyers put a significant value on future earnings and a healthy, growing patient base.

Selling Your Dental Practice: Key Things to Consider

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

Dental Practice Buyers' Industry Considerations

Smart buyers weigh risks versus rewards when considering the purchase of a company. Key trends in the industry that impact risk are as follows:

How Much Buyers Will Pay for a Dental Practice (Market Multiples)

Pricing rules of thumb are a quick but somewhat inaccurate way of estimating value. One of the rules of thumb is that dental practices are priced by buyers at 60.0% to 80.0% of annual revenue. The problem with this method is that some practices are more profitable and have more growth opportunities than average. As such, those practices should be priced higher than average. Moreover, larger practices sell for higher relative purchase prices than smaller practices.

Accordingly, buyers most often determine an offering price based on a multiple of normalized or adjusted cash flow. Adjustments to cash flow include nonrecurring expenses, such as one-time legal fees, and discretionary expenses, such as charitable contributions, owners’ compensation, and owner-related personal expenses.

Market multiples refer to the estimated purchase price, or enterprise value, related to adjusted cash flow. The typical range of market multiples for dental practices is 2.5x to 4.5x of adjusted cash flow. A particular provider falls within the range based on quantitative factors, such as historical and projected financial performance, and qualitative factors, such as location, the remaining term of property lease, employee turnover, type, technology, and age of equipment. Moreover, size matters, as larger revenue practices attract more buyers than smaller practices.

The following are estimated market multiples of cash flow for dental practices by revenue, assuming positive qualitative qualities:

For example, a practice with $4.5 million in annual revenue and $900,000 in adjusted cash flow (20% adj. cash flow margin) would have a market value in the range of $3.1 million to $3.6 million.

There are outlier market multiples in unique merger and acquisition (M&A) 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.

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

Capital Expenditure Adjustments to Price

Capital expenditures other than ongoing maintenance capital expenditures are expenses expected to generate future benefits, such as the cost of purchasing new dental equipment and information technology equipment. Future projected capital expenditures decrease cash flow to buyers. Buyers typically subtract future expected annual capital expenditures from adjusted cash flow to estimate future cash flows. A decrease in cash flow will lead to a lower purchase price.

Key Takeaways for Dental Practice Owners

Owners of dental practices who have properly prepared their company for sale will find a robust market of eager buyers willing to pay for value. Market conditions are currently very favorable to sellers/owners. If you'd like to know the market value of your practice or if you're ready to talk about selling your practice, please feel free to reach out to me directly.

References

IBISWorld Reports

The goal of the accounting function in any business, including healthcare, is to report on a company's transactions of economic substance. Financial reporting should be communicated in a way that is accurate, consistent, and timely. In the United States, accounting practices must adhere to generally accepted accounting principles (GAAP), which are organized and communicated through the Accounting Standards Codification (ASC). ASC is maintained by the Financial Accounting Standards Board (FASB). Revenue recognition for most healthcare companies is currently governed by ASC Topic 606, Revenue from Contracts with Customers.

Revenue recognition — which "identifies the specific conditions in which revenue is recognized and determines how to account for it" — is an essential concept for all healthcare companies, especially those looking to make an exit. Investors will want to know that revenue is recognized in a manner consistent and appropriate for the healthcare industry. Not adhering to revenue standards may affect the earnings on which your transaction is priced and can have a significant impact on your net proceeds.

Recent changes in accounting standards, including those relating to revenue recognition, move towards principles-based accounting as opposed to traditional, rules-based accounting. Principles-based accounting, the most popular system globally, is founded on the belief that it is better to adjust accounting principles to a company's transactions rather than adjust a company's operations to accounting principles. This gives companies more freedom in reporting and less complexity than rules-based principles. The framework standardizes revenue recognition across industries, making it easier for investors and other consumers of financial statements to compare results.

The framework of ASC 606 recommends that healthcare companies recognize revenue when control of goods or services transfer to the customer in the amount of consideration the healthcare organization expects to receive. The FASB has defined a five-step approach that healthcare companies should follow when applying this standard:

1. Identify the contract(s) with a customer

2. Identify the performance obligations

3. Determine the transaction price

4. Allocate the transaction price

5. Recognize revenue when/as performance obligations are satisfied

Below we will take a closer look at each of these steps. Before we do so, it should be noted that this standard does not apply to insurance contracts, lease contracts, financial instruments, guarantees, and nonmonetary exchanges. It also excludes contributions and collaborative agreements. Healthcare companies that fall under ASC Topic 954: Health Care Entities and their insurance-driven revenue are included in the scope of ASC 606. Insurance entities engaged in administrative services only (ASO) contracts must adhere to ASC 606 for those contracts.

Step 1: Identify the Contract(s) with a Customer

A contract can be written, oral, or implied and, in essence, represents a "meeting of the minds." A contract must have commercial substance, parties that are committed to their obligations, identifiable rights, and known payment terms. It must also be probable that the amount of consideration will be collectable. This means healthcare organizations must immediately assess a customer's ability and intent to pay as their obligation becomes due.

A healthcare provider may use experience with the customer or a portfolio of historical data to make this assessment. If the collectability threshold is not "probable," no contract exists, and no revenue can be recognized. Determining collectability can be onerous for healthcare providers unable to evaluate a customer prior to care (e.g., ambulance arrivals, emergency room visits) as they must reevaluate collectability as information is received. Healthcare-specific collectability considerations may include insurance status, patient responsibility, employment status, and/or changes in the responsible party.

Step 2: Identify the Performance Obligations

A performance obligation is a promise to transfer goods or services to the customer that is distinct or a series of distinct goods or services — in other words, the "unit of account" under ASC 606. Distinct is defined as goods or services that can be benefitted from on their own or with other resources readily available to the customer. If a good or service cannot be defined as distinct, it must be bundled until the bundle of goods or services is considered distinct.

A transaction price may include multiple performance obligations in which the price must be allocated among the obligations (see step 4). For example, a healthcare company provides medical equipment (e.g., hospital beds) with a warranty. As the warranty likely holds no value without the equipment, this would be considered a bundle of goods or services that represents one performance obligation. If the hospital bed came with a free pillow, this would represent two distinct items, so two performance obligations are identified.

In the healthcare industry, services often include several elements, such as room, meals, nursing, physicians, and medications. These elements may or may not be considered distinct, depending on the specific circumstances.

Step 3: Determine the Transaction Price

The transaction price is the amount of consideration a business expects to be entitled to for completing its performance obligation(s). It can also be defined as the amount allocated to each performance obligation in the contract as those obligations are fulfilled. Transaction price excludes any amount collected by third parties, such as sales tax.

A healthcare company should include all sources of payment in the transaction price, including the customer, insurance companies, and governmental organizations. The transaction price may also include fixed and variable amounts. Any variable component to price must be determined at the inception of the contract and reevaluated at each reporting period end. Variable components may include implicit price concessions (contractual adjustment), prompt-pay discounts, uninsured discounts, contractual adjustments, and other revenue adjustments. Net patient revenue should represent the estimated cash flows expected to receive from services at the time they are provided.

As a result, healthcare companies recognize significantly less bad debt than seen under previous revenue recognition standards because bad debt is only recognized when the patient has a true inability to pay (e.g., job loss, loss of insurance coverage). Under ASC 606, price concessions (i.e., change in the estimate of price) are recorded as contra-revenue and impairment loss (i.e., patient bad debts) is considered an operating expense.

Step 4: Allocate the Transaction Price

Once the performance obligations have been identified and the transaction price has been established, the price must be allocated amongst the performance obligations. This is typically done in proportion to their standalone selling prices. The standalone selling price is the price each distinct good or service would have sold for separately at the inception of the contract. Discounts, calculated as standalone selling price less the transaction price, are generally allocated proportionally based on the standalone selling price, but there are some exceptions. Variable consideration may be allocated on a non-pro-rata basis if the variable payment relates specifically to one or more, but not all, performance obligations. If there is a change in the contract price, the new allocation should be completed using the same basis used at the inception of the contract.

Step 5: Recognize Revenue as Performance Obligations are Satisfied

Revenue is recognized when performance obligations are satisfied by transferring goods or services at the transaction price that was established per step 4. For healthcare companies, the transfer occurs when the customer or patient obtains control of goods or services. The transfer may occur at a point in time or over time. This means if a healthcare provider is reimbursed on a fee-for-service basis, revenue would be recognized when the service is provided. Alternatively, if the provider is reimbursed for providing a service over a period, revenue would be recognized pro-rata over the time of the service.

Comprehensive Example

Let's take a look at an example of ASC 606 in practice.

A residential treatment facility accepts a client for a 45-day treatment stay. An understanding by both parties is evidenced by a service agreement that details the rights of both parties, that includes the right for either party to terminate the contract at any time without penalty, and is signed by both parties. The agreement states the cost of a 45-day stay is $25,000. Payment of $25,000 is to be collected in two payments: $20,000 upon admission and $5,000 after the client is discharged for 15 days. The cost of service covers room and board, food, psychiatric analysis, and clinical services. The fee does not cover elective, non-medical ancillary services (e.g., haircuts, massage). At the end of the contract, the client may elect to extend for a period, with the price to be determined later. The treatment center feels it is probable that they will receive payment in full for all services because the client's credit assessment was favorable, and the center provided services to this patient last year and received timely payment.

The client makes the first payment of $20,000 upon admission. He also elects to use ancillary services resulting in fees of $500, which are paid for at the time of service. After the client is discharged for 15 days, the accounting department is unable to collect the second payment of $5,000 because the credit card on file declines. The treatment center then learns that the client lost his job while in treatment and is unable to pay for services rendered.

Now we can see how the five steps described above would be applied to this example.

Step 1: It is clear that a contract exists as there is a written agreement stating the obligations and rights of both parties and the payment terms. The collectability threshold is met by the historical payment experience with the customer. The receipt of new information regarding employment status triggers the recognition of bad debt expense in the amount of $5,000. The extension of services would require a new contract as the terms and payment are not defined.

Step 2: Although the client could benefit from some of the individual services included in the cost of service, the nature of the treatment center's service is to deliver (i.e., transfer) a combined item (i.e., residential rehabilitation services). Therefore, those services such as room and board, food, psychiatric analysis, and clinical services are considered one performance obligation. The non-medical ancillary services are capable of being distinct from the standard services provided in the contract, and these services could even be purchased elsewhere. These services represent a separate performance obligation that should be recognized as revenue as the service is provided.

Step 3: The treatment center expects to receive $25,000 for its performance obligation of residential treatment services; thus, the transaction price is $25,000. The $5,000 payment not received represents bad debt expense and not a price concession because it represents a true inability to pay and not a discount or other revenue adjustment. If the client were to seek services in the future, the treatment center would have to determine the amount of payment that is probable and record a price concession for the difference between the standalone selling price ($25,000) and the transaction price (i.e., amount expected to be collected).

Step 4: In this step, the transaction price must be allocated to the two performance obligations identified in step two.

Step 5: Residential treatment services are delivered over a period of 45 days, so revenue would be recognized pro-rata over the treatment period to the sum of $555.55 per day. The ancillary services are fee-for-service, so revenue of $500 would be recognized when the service is rendered. A bad debt expense of $5,000 would be recognized when the patient's insolvency is discovered.

Appreciating the Importance of Revenue Recognition

Applying GAAP revenue recognition policies is an imperative best practice for all healthcare companies as it affects the integrity and reliability of an organization's financial reporting. Revenue is one of the most important metrics used by potential buyers to measure value, and improper application of ASC 606 can delay or even derail the sales process. If you have questions regarding revenue recognition for healthcare companies or the M+A process, please reach out to us at VERTESS.

The only constant for home healthcare agencies is change. For many owners of agencies, change is both demanding and fatiguing. At some point, owners start thinking about exiting their company. Some owners elect to pass ownership down to their adult children. Some stop taking on new clients/patients and simply close their doors. Others seek to sell their company in the marketplace. This column is written for those owners considering selling in the marketplace.

The merger and acquisition (M&A) market for home healthcare agencies is currently very robust, with buyers eagerly gobbling up well-performing agencies. As such, this may be the best time to sell if you're looking to get the highest price, best terms, and well-suited buyers. 

Why are buyers eager to buy? Home healthcare agencies are one of the fastest-growing industries in the healthcare sector. Thanks to an aging population, an increase in chronic diseases, the growth of physician acceptance of home healthcare, medical advancements, increased demand for home-based care (especially for the elderly or in times of a pandemic), and a movement toward cost-efficient treatment options from public and private payors, the industry has flourished. Moreover, the industry is anticipated to grow over the coming years, which will allow providers to compete effectively with institutional care agencies, such as hospitals.

Home Health Industry at a Glance

According to the Medicare Payment Advisory Commission's ("MedPac") March 2019 report to Congress, between 2004 and 2016, the number of home health agencies increased by over 60%. Currently, there are approximately 12,000 active home health agencies in the market, and as of 2017, approximately 98% of Medicare beneficiaries lived in a zip code with a home health agency.

Total Medicare spending on home health services increased by 108.2% from 2000 to 2017. MedPac estimated operating margins for freestanding home health agencies to be approximately 4.5% for the blended all-payor margin.

The home health industry is highly fragmented, with Medicare spending per agency of approximately $1.5 million. According to a LexisNexis 2019 study, the top five home health operators based on yearly medical claims and patient volume data — Kindred Healthcare, Amedisys, LHC Group, Encompass Health Corp., and AccentCare — represent approximately 20% of the total home health market share. Industry fragmentation offers consolidators the opportunity to leverage back-office support functions, economies of scale, and market share expansion through acquisitions.

If you're thinking of selling your home healthcare company, you should know the following:

Home Health Buyers' Concerns

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

What Home Health Buyers Are Looking For

In our experience, the most crucial feature buyers are looking for in a company is profitable growth. Buyers want to know that they can take what you have built and build on it. But, in their risk/reward analysis, they'll want to see that your strengths far outweigh your weaknesses (i.e., opportunities for improvement). Most buyers have a checklist mentality, where they'll be looking to see that you have at least some of the attributes below: 

How Much Will Home Health Buyers Pay (Market Multiples)

Typically, buyers go through their risk/reward analysis and come up with an offering purchase price. Usually, the offering price is based on a multiple of normalized or adjusted EBITDA.

Adjustments to EBITDA include nonrecurring 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 lease expenses. 

Market multiples refer to the estimated purchase price, or enterprise value, related to adjusted EBITDA. The typical range of market multiples for home healthcare agencies is 4x to 6x of adjusted EBITDA. A particular provider falls within the range based on quantitative factors such as historical and projected financial performance, and qualitative factors as highlighted above in the "What Home Health Buyers Are Looking For" section. Moreover, size matters, as larger revenue agencies attract more buyers than smaller agencies. 

The following are estimated market multiples for home healthcare agencies by revenue, assuming positive qualities related to "What Home Health Buyers Are Looking For" above:

For example, an agency with $4.5 million in annual revenue and $450,000 in adjusted EBITDA (10% adj. EBITDA margin) would have a market value in the range of $1.9 million to $2.1 million.

There are outlier market multiples in unique M&A 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. 

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

What About My Home Health 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 that 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. However, there are occasions where a buyer wishes to assume the company's debt as a way to finance part of the purchase price. 

Net Working Capital Adjustments to Price

Working capital is usually calculated by subtracting current assets from current liabilities. Net working capital is used to gauge a company's operating liquidity at a particular point in time.

While all the accounts that make up net working capital are listed on a company's balance sheet, inclusion or exclusion of individual accounts is often negotiated between buyers and sellers. Accounts usually included in the calculation of new are cash, accounts receivable (A/R), inventory, prepaid expenses, accounts payable (A/P), and accrued liabilities. Other current assets and current liabilities that may be included in net working capital include short-term investments, cash advances to employees, insurance claims, owner receivables, notes receivable, security deposits, A/R due from affiliates, 401(k) payables, A/P due to affiliates, customer deposits, and income taxes payable. 

Buyers expect a normal amount of net working capital at closing to ensure adequate liquidity the day after the purchase date. Buyers expect a normal amount of collectible A/R, sellable inventory, no past-due A/P, etc.

In the event that there has been a change in the amount of normalized net working capital prior to the closing date, the purchase price of the company is usually increased or decreased accordingly. 

Net working capital is an integral part of a company's overall value. As such, it's critical that a normalized amount of net working capital transfers to the buyer at closing.

Capital Expenditure Adjustments to Price

Capital expenditures that are not ongoing maintenance capital expenditures are expenses expected to generate future benefits, such as the cost purchasing vehicles, information technology equipment, etc. Future projected capital expenditures decrease cash flow to the buyers. Buyers typically subtract future expected annual capital expenditures from EBITDA to estimate future cash flows. A decrease in EBITDA will lead to a lower purchase price.

The Gist

Owners of home healthcare agencies, who have prepared their company for sale, will find a robust market of eager buyers willing to pay for value. Market conditions are currently very favorable to sellers/owners. If you'd like to know the market value of your agency, or if you're ready to talk about selling your company, please feel free to reach out to me. 

We can help you with more information on this and related topics. Contact us today!

Email David at dcoit@vertess.com or call (480) 285-9708.
References:
IBISWorld Reports
MedPac

About VERTESS

VERTESS is the advisor of choice for many home healthcare agencies/agencies business owners because of our track record of success and deep industry expertise. It would be best to speak with an advisor at least annually to understand the market and your options.

A visionary group of results-oriented professionals formed VERTESS as an alternative to traditional M&A firms and investment banks. We focus primarily on your personal and professional goals and help facilitate transactions that make sense to you for the long term. We guarantee integrity, con

olume 10, Issue 21, October 10, 2023

Mergers and acquisitions (M+A) are complex transactions that involve multiple parties, intricate negotiations, and significant financial investments. While the excitement surrounding potential synergies and growth/exit opportunities often takes center stage, there is a lesser-known, yet equally important factor that can significantly impact the success of an M&A deal: deal fatigue.

Deal fatigue refers to the exhaustion, frustration, and reduced enthusiasm that can set in over time among key stakeholders involved in an M+A transaction, both from the seller’s side and the buyers’ side. It is a phenomenon that can gradually erode the effectiveness of the deal-making process. If not managed properly, deal fatigue can ultimately jeopardize the entire transaction, which we at VERTESS have witnessed firsthand.

In this column, I will explore how deal fatigue can impact an M+A transaction and share some strategies to mitigate its effects.

The Phases of an M+A Transaction

To understand the impact of deal fatigue, it's important to first understand the different phases of an M+A transaction.

Pre-transaction — This phase involves identifying potential acquisition targets or buyers, conducting financial and operational due diligence, and structuring the deal.

Negotiation — During this phase, both parties engage in negotiations to agree on the terms and conditions of the transaction, including the purchase price, asset allocation, and any contingencies. It’s important to understand that negotiating the limited terms in a letter of intent (LOI) is only the beginning of negotiations. You or your advisor will likely be negotiating on behalf of your company throughout the entire process.

Due diligence — Once the deal terms are agreed upon and an executed LOI is in place, an in-depth due diligence process is initiated. The due diligence process involves reviewing financial, legal, operational, and cultural aspects of the target company. Due diligence varies from buyer to buyer and transaction to transaction, with the average time commitment around 90 days. On the shorter side, it can run 60 days. On the longer side, it can reach or even exceed 120 days.

Integration — Post-closing, the integration phase begins. This is where the two organizations involved in the transaction merge their operations, cultures, and systems to realize the anticipated synergies and benefits of the transaction. This can easily be a 6-12 month process and involves numerous departments working together to make it as seamless as possible for staff.

A woman battles depression and stress in her workplace, highlighting the challenges faced by professionals. This image captures the impact of mental health on employees in a corporate environment.

How Deal Fatigue Can Impact M+A Transactions

Now let's look at some of the more common hurdles brought on by deal fatigue.

Reduced focus and diligence — As an M+A transaction progresses, stakeholders may start to feel overwhelmed by the sheer volume of work and complexity involved. This is typically because sellers often haven’t been through the transaction process before and may not have a clear understanding of the work required. This can lead to a decrease in seller motivation and engagement, which can result in missed critical issues during due diligence or negotiation.

Extended timeline — Deal fatigue can lead to delays as exhausted parties may request more time to review documents, make decisions, or simply take a break. These delays can increase costs and disrupt the transaction's momentum. No two buyers are the same, and their processes for due diligence won’t be either. I would say 8 out of 10 M+A deals I have worked on at VERTESS require an LOI extension to extend the due diligence period. This can take a mental hit on the parties involved as well.

Erosion of trust — As fatigue sets in, trust between the parties can erode. This can manifest as increased skepticism or suspicion, making it harder to come to mutually beneficial agreements. This can also lead to what we call in the industry “re-trading,” where a buyer or seller changes terms or purchase price strategy or both shortly before closing. Re-trading is, at best, a difficult situation to weather and, at worst, a deal killer.

Deal breakdown — In extreme cases, deal fatigue can become so pronounced that one or both parties decide to walk away from the transaction entirely, leading to wasted time, resources, and opportunities — not to mention the costs associated with a transaction for both buyer and seller (e.g., attorney's fees, quality of earnings (QofE) accounting firms, third-party diligence vendors).

Millennial black businesswoman addressing colleagues at a corporate business meeting, close up

Mitigating Deal Fatigue

The right plan can overcome the toughest challenges in a transaction, even daunting deal fatigue. Here are some of the key elements of such a plan.

Effective project management — Implementing strong project management practices can help keep a deal on track and ensure that deadlines are met. Clear timelines, milestones, and responsibilities should be established and monitored. A strong advisor and M+A firm will vastly increase the effectiveness and accountability for both sides during a transaction.

Open and transparent communication — Maintain open and honest communication channels between all stakeholders. Address concerns and issues promptly to prevent them from escalating into deal-breaking problems, especially any legal woes the selling company has been party to.

Managing workload — Ensure key team members are not overburdened with excessive work. Consider bringing in additional resources or expertise when needed to alleviate pressure. When we run a transaction process at VERTESS, we recommend our clients bring in 1-2 additional staff that can help pull diligence materials.

Setting realistic expectations — Be realistic about the time and effort required for an M+A transaction. Overly aggressive timelines can contribute to deal fatigue. Setting appropriate expectations is another facet of a transaction a professional M+A team can walk through with you.

Flexibility — Be willing to adapt and make reasonable concessions when necessary to keep the deal moving forward. Rigidity can exacerbate fatigue.

Red paper plane breaking through obstacle on blue background, Concept of overcoming barriers, goal, target

Don't Sleep on Deal Fatigue

Deal fatigue is a formidable but often underestimated challenge in the world of M+A transactions. Its impact can be subtle, gradually eroding the efficiency and effectiveness of the deal-making process.

By recognizing the signs of deal fatigue and implementing proactive measures to mitigate its effects, companies can increase their chances of successfully navigating the complex terrain of M+A transactions and achieving their strategic objectives. Effective deal management, open communication, and a focus on the well-being of all stakeholders are keys to mitigating the negative impact of deal fatigue and ensuring the long-term success of M+A deals.

Issue 10, Volume 20, September 26, 2023

If you're thinking about selling your healthcare business, one of the questions you're probably most interested in getting answered is: "What is the value of my company?" That is one of the most common and early questions we at VERTESS get asked by clients.

Our initial answer? It depends. That will always be our first answer, as frustrating as it is for clients to hear. The truth is there's no way to confidently answer this question before we gather the information necessary to provide an accurate figure.

Think about selling your house. The real value is only determined after assessing issues like its location, size, age, special features, and what has sold recently in your market that is similar to your home.

Here are some of the most important factors for accurately determining an estimated market value for healthcare companies.

1. Your financial health

To establish a valuation, we must know your revenue and profit margin. These are often the pieces of information we request first from clients, along with some other key financial details. There are several reasons why:

2. Tenure of staff.

The tenure of a company's staff generally helps strengthen valuation and offers from buyers. Most healthcare companies are struggling to hire and retain staff. If you can show employment longevity, employee satisfaction, and the ability to effectively hire, these can be value-adds for buyers.

Additionally, most buyers would like to see that the company will continue to thrive without an owner's leadership. Showing them a mature management staff that can take over following your exit is important. This will increase your buyer pool since many buyers want to see that strong leadership will remain in place post-transaction before making an investment.

3. Quality of your services.

This factor, as illustrated through data and satisfaction survey results, can also be a gamechanger. One of our jobs at VERTESS is to help sellers tangibly highlight the amazing qualities of their organizations. It is helpful to show quality assurance data and other information that can quantify the strengths of the services you provide and the people delivering them.

4. Location.

The state(s) you operate in can play into your value. This is largely based on factors like local reimbursement rates, availability of staff to hire at an affordable rate, and the friendliness of that state for running a business. I have heard from buyers that there are a handful of states they will not work in because of one or more of these factors. Such a perspective can limit a buyer pool, which in turn will reduce the number of offers that can drive up your sales price. Location is not a deal killer, but when it's not viewed positively by buyers, more work may be required to find the right buyer willing to pay a fair price.

5. Industry.

This is a moving target. We frequently see the pendulum swing based on the industries private equity firms are most excited about. A few years ago, applied behavioral analysis (ABA) service providers were rumored to be selling in the double digits, while intellectual or developmental disability (I/DD) provider organizations were generally trading at a multiple between 4.5x and 7x of their adjusted EBITDA. Today, we're seeing ABA services trading closer to where I/DD services are falling. Again, a company's valuation greatly depends on the factors discussed earlier, and some companies in these sectors can still achieve double-digit multiples, but it's not the norm. 

Want to Learn What Your Healthcare Company Is Worth?

Within healthcare, we see companies trading at an average between 5x and 7x their adjusted EBITDA. Your company could end up over, under, or between this range. Where you fall will vary greatly based on the many aspects of your company, including those key factors identified above. Finding out what your company is worth is complex and cannot be determined by filling out a form. It takes skilled healthcare M+A advisors, like those with VERTESS who are knowledgeable about your industry and have their finger on the pulse of transaction activity, to help you determine the value of your company.

If you're thinking about selling your company and want to know what it's worth or want to learn what you can do to better position your business for a future sale and possibly a higher sales price, reach out to me (my contact information is below) or any other VERTESS advisor. We'd love to speak with you and find out how we can help you achieve a successful sale!

Volume 10, Issue 18, August 29, 2023

Ambulatory surgery centers (ASCs) are a hot commodity. We're seeing an increase in the number of ASCs coming on the market and plenty of interest in high-performing — and sometimes underperforming — centers from the likes of hospitals and management/development companies, and to a lesser extent other ASCs/physicians and private equity (PE) firms. The latter is largely more interested in investing in companies with existing ASC portfolios or medical groups which own and operate one or more ASC. We're also seeing a growing number of PE firms going head-to-head with the large ASC strategic buyers and offering competitive alternatives to these heavyweight managing companies.

In some instances, an ASC doesn't even need to come on the market to generate acquisition interest. We're seeing strategic partners increasingly approaching ASCs to gauge and express interest in a transaction.

What are the factors currently pushing acquisitions in the ASC market? Based on my conversations with ASC owners we at VERTESS are currently representing, strategic buyers who have bid on ASCs I've represented, and industry experts at national and state conferences, the following are some of the most significant contributing factors.

Physician recruitment and retention

I hear this reason cited repeatedly in the ASC deals I'm working on. Many physicians will not commit to bringing procedures to and performing them at an ASC unless there is an opportunity to invest in the center and become an owner. This is an advantage a strategic partner can provide. Independent ASCs can easily lose surgeons to more lucrative buy-in opportunities with competing facilities or because the center lacks ownership share options, which can motivate physicians to "shop" centers in their patient market. A strategic partner can expand the investment opportunities available in an ASC and make those investment opportunities more appealing for reasons that we will cite further below.

Staff recruitment and retention

The biggest challenge facing most ASCs today is staff recruitment and retention, and this is another area where a strategic buyer can have a significant, positive impact on an independent ASC. Strategic companies often provide more incentives for staff to join and remain with an ASC. These incentives do not necessarily concern salary/pay, although they can. Strategic companies can generally offer better benefits because of their larger purchasing power and budget.

We saw just how much of a difference an ASC with a strategic partner can make during the early months of the COVID-19 pandemic. Smaller, independent ASCs were either forced to completely shut down or borrow money to remain open, with many centers experiencing staff shrinkage due to the loss of or significant declines in incomes. Centers with strategic partners were largely able to keep their staff more effectively because they continued to pay staff at least a reduced salary when they shut down or had reduced operations. These centers were also able to reopen and ramp back up operations quicker because of improved access to the likes of protective equipment and support developing revised policies and procedures.

Access — to capital, payer contracts, supply contracts, and more

A strategic partner can enhance the access of an ASC in many ways. There's access to capital needed to purchase new equipment and technology and undertake expansion/renovation. These can help an ASC add specialties and procedures as well as recruit and retain physicians.

There's access to more and/or better commercial payer contracts, which can increase profitability and the ability for the ASC to pursue growth opportunities quickly and more effectively.

There's access to supply contracts, which can help reduce the cost of supplies and equipment and make capital investments more affordable.

And there's access to other important products and services an ASC needs or may want, including health insurance for staff, insurance for the facility and its staff (e.g., general liability, workers' compensation, cybersecurity), outsourced revenue cycle management, and information technology.

Exit strategy

The ASC industry is now over 50 years old. We're seeing physicians who have been owning and working in ASCs for decades recognizing that they need an exit strategy, with more business-savvy physicians understanding that such a strategy should be executed earlier than later. Physicians can sell a portion of their ASC, earning them a nice payout and reducing their risk without giving up full ownership. These physicians can then financially benefit from new efficiencies, better contracts, the addition of services and surgeons, and other improvements brought in or accelerated by the strategic partner. The physicians can continue to earn a good living and ownership distributions while they wind down their careers down and then earn a final payout when they fully exit ownership.

Other factors

A few other factors helping motivate ASC owners to consider a sale include the following:

Always Be Thinking Acquisition

All private ASCs should build and develop their centers to be attractive to acquisition. This will help ensure that when ownership decides the time is right to take on a strategic partner, centers will be developed in such a way that they are more likely to attract multiple offers at higher multiple. Areas ASCs should focus on beyond some of those discussed above: integration, bringing on multiple physician partners, and a developing strong marketing footprint. These will demonstrate value to buyers as much as the ASC's profit and loss (P&L) statement.

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. You can contact me using my information below. If you're attending Munsch Hardt's Texas Health Care Transactions Conference on Thursday, September 21, let's meet up! I'll be serving on a panel on "Leading the Charge: Examination of Ancillary Providers + Opportunities for Integration." Feel free to approach me before or after the talk or email me to schedule a time to chat.

If you're interested in learning more about how to know when it is time to consider a strategic partner, I recently discussed this topic on the HST Pathways "This Week in Surgery Centers" podcast. You can find more details and access the episode on the HST website.

Volume 10 Issue 10, May 9, 2023

The process of selling your healthcare business or attracting investors is often referred to as “selling your baby,” reflecting the very personal nature of this important business transaction. While each transaction is unique, we have identified 20 attributes that determine the probability of successfully completing a transaction.

We’ll review these attributes below and touch on what you can do to improve your probability of closing. Note: Read to the end to learn about how you can access a tool that will help you conduct a self-examination to determine the probability of closing a transaction involving your business. 

1. Owner commitment 

The level of owner commitment to sell their business is a key attribute in determining the probability of closing. The most common reasons owners decide to sell their business are retirement, burnout, divorce, illness, relation/lifestyle changes, poor company performance, industry or competition changes, reimbursement changes, partner disputes, and various financial reasons. Of these listed reasons, retirement, burnout, and financial reasons — most notably a desire to recapitalize the company — are the top three reasons an owner chooses to sell their “baby.”

Owners seeking retirement or suffering burnout or illness typically have a high level of commitment to sell, whereas owners wishing to recapitalize, going through a divorce, or having partner disputes have a medium to low level of commitment to sell.

Commitment is keenly important as the sale or transaction process is long and difficult. All parties to a transaction must be willing to work diligently to reach a successful closing. 

2. Giving up control

The owner’s willingness to hand over the reins of their company to a buyer is often challenging. As owners, you’ve grown accustomed to calling the shots. You know the value of controlling the company derives from the fact that you believe that you operate the firm differently — and better — from the way others would. It’s a difficult decision to hand your baby over to others. However, once you’re committed to selling your company, you must also commit to giving up control. 

In the past, we’ve seen sellers sabotage the success of a transaction because they could not emotionally relinquish control. Sellers must envision the company prospering under new leadership. This is especially true for recapitalizations, where the owners stay on as minority owners post-closing. Our advice is to choose a buyer that gives you confidence in their ability to successfully run the company post-transaction. 

3. Realistic expectations of value 

Skilled M+A advisors who genuinely understand your industry and are experienced selling firms of your size will have keen insight as to the amount buyers are willing to pay for your company. The value of your business, in the eyes of buyers, is based on risk and reward and current market conditions. 

Moreover, the perceived value of your company is based, in part, on the number of similar companies in the M+A marketplace. Buyers will ask themselves why they should pay X dollars for your company when there are several other similar companies that they can acquire for Y dollars.

A major challenge for some sellers is getting a realistic expectation of value when their company is experiencing above-normal growth. We heard owners say, “If I just wait one more quarter…” as they pondered the estimated market value of their business. We call that thinking “chasing rainbows.” We’ll often tell owners that the best time to sell a growing company is “never” because they’ll always feel that they’re leaving money on the table. The real answer is that you should sell your business when you’re ready to do so. 

4. Personal financial readiness

Financially speaking, there are two types of business owners: those who depend on the proceeds of the sale of their business to meet their long-term financial goals and those who are not relying on that income to meet their financial goals. Most of our clients fall into the former category. As such, those owners want to know if the after-tax proceeds from selling their business are sufficient to provide them with their desired lifestyle post-transaction.

Before taking on a new client, we at VERTESS undertake a mFarket valuation of their company. Providing owners with an expectation of value for their business provides them with an opportunity to determine if the sale proceeds would meet their financial needs going forward. 

Occasionally, we’ll have owner clients who hope the final purchase price exceeds our expectations of value. Most of those circumstances lead to unsuccessful transactions as the gap between buyers’ offers and seller’s pricing needs is too great to close. 

5. Degree of flexibility 

Flexibility is arguably a key attribute for owners looking to sell their businesses. Since there are many variables concerning the sale of a business, being flexible allows buyers and sellers enough latitude to negotiate a final agreement. An inflexible owner allows little space for negotiation, usually leaving prospective buyers frustrated and inadvertently sabotaging what could have otherwise been a successful transaction.

We’ll often hear a seller say, “That’s a deal breaker,” regarding a buyer term or provision. It’s been our experience that calm, steady, persuasive, and intelligent negotiations can overcome any “deal-breaker” provision.

Also, owners should be willing to negotiate on price. At the end of the day, the marketplace will determine the value of your business. There are many reasons why business owners may fail to receive the price they want for their business. One way to mitigate this problem is to work with a skilled M+A advisor to address pricing issues early in the transaction process so these issues are minimized or eliminated. 

6. Information request responsiveness 

A key reason for unsuccessful transactions is loss of momentum due to unresponsive sellers. When owners do not promptly respond to information requests, buyers wonder if the owner is either ineffectual or getting cold feet. 

M+A transactions have a certain timing and rhythm. Serial buyers are profoundly aware of typical information turnaround cycles and will raise concerns early on when owners are unresponsive. Buyers want to be assured that the seller is committed to completing a successful transaction or they will go and find a seller with the right level of commitment.

7. Low owner reliance 

Businesses that rely on the owner’s day-to-day engagement in the operations and growth of the organization have high owner reliance. Have you ever realized that it’s impossible for you to take a day off without feeling like the business will fall apart without you? If so, your business may have too much reliance on you. 

Buyers are acutely aware of the negative effects of too much owner reliance, where employees are worried about making decisions without your input. Identifying and developing future leaders in your organization helps create long-term sustainability and frees you up to focus on strategic matters that create value.  

8. Sound historical performance 

A business with an ongoing history of positive financial performance over the past three to five years indicates a relatively low-risk organization. Similarly, companies with a history of meeting or exceeding industry growth and profit margin are an indication of a well-run business.

9. Good current performance 

Interestingly, a company’s current or recent financial performance is one of the most important indications of sound financial performance to buyers. Financial performance is a complete evaluation of a company’s overall standing in categories such as assets, liabilities, equity, expenses, revenue, and overall profitability. It is measured through various business-related formulas that allow managers and investors to calculate exact details regarding a company’s potential effectiveness in creating value. 

10. Positive expected future performance 

The reality is that buyers are acquiring a company’s future performance. Companies with a seemingly bright future will attract solid offers. Curiously, however, companies with “too-good-to-be-true” projections of future performance will often scare off potential buyers because of skepticism concerning such rosy prospects. 

11. Few personal expenses in P&L 

We often find ourselves looking at seller profit and loss (P&L) adjustments made to earnings before interest, taxes, depreciation, and amortization (EBITDA) on a business for sale and saying, “What in the world are they thinking?” 

Although legitimate adjustments can be perfectly acceptable, owners that run excessive personal expenses through their business that would not be assumed by a future owner (e.g., fun trips, memberships) cause concern among buyers. Sometimes, family members are paid far-above-average salaries and will not continue with the company. 

On justifiable adjustments, you’ll hear no contest from us. However, just because adjustments are justified doesn’t mean they’ll leave a good impression on investors. We recently saw a business barely breaking even with a sizable adjustment for private air travel. Such adjustments speak volumes about an owner’s priorities.

12. Excellent bookkeeping and accounting records 

Having well-prepared financial reporting allows owners to better prepare for making sound financial decisions to grow the business. Moreover, improved financial management allows you to focus on current financial matters while developing improvement and growth plans. Inaccurate financial statements will be discovered during buyer due diligence and lead to a lower valuation or lost sale.

13. Low employee turnover 

Business owners who focus their efforts on building employee engagement can create a positive working atmosphere, give employees a sense of pride in their work, and encourage people to remain with the company, avoiding the negative impact of significant staff turnover. Companies with relatively high turnover (i.e., above the industry average) will cause concerns from buyers and ultimately increase the perception of a company's riskiness. 

14. No supply chain issues 

Healthcare companies faced unprecedented supply chain upheavals over the past several years due to a confluence of events from the pandemic to geopolitical tensions. The result was significant, ongoing disruption to global supply chains. 

Companies that have taken steps to mitigate past supply chain issues are better able to return to normal vendor supply delivery terms. Those companies that continue to face supply chain headwinds will find buyers hesitant to make quality offers or finalize the transaction process. 

15. Due diligence support 

We’ve seen occasions where a seller elects to “go it alone” through the due diligence process. Due diligence is a process or effort to collect and analyze information before one decides to proceed with or conducts a transaction. Due diligence helps ensure one party is not held legally liable for any loss or damage and the other party knows what they’re buying.

Common consequences of a go-it-alone due diligence strategy are it slows the due diligence process, takes owners away from running the day-to-day operations of their company, and leads to seller and buyer fatigue. As such, it’s best to put together a due diligence team to run the process. 

16. Using a seasoned M+A attorney 

Nothing creates more stress on a transaction than either party being represented by a non-M+A attorney. The legal ramifications of an M+A transaction are unique. Negotiating M+A transaction terms is a critical piece of any acquisition/sale. Experienced healthcare M+A attorneys know what terms they need to focus on to structure the best deal for you. Inexperienced or non-M&A attorneys, on the other hand, might not push hard enough on critical terms and too hard on non-critical ones, wasting considerable time and effort while creating unnecessary deal fatigue.

17. Not micromanaging the process 

Micromanaging is someone trying to personally control and monitor every aspect of a team, situation, or place. Micromanaging leads to seemingly countless deal revisions requested, status reports being demanded more often than necessary, and an apparent lack of trust in other members of the team to get on with their work and do their jobs. 

We’ve witnessed firsthand the negative effects of a micromanager seller, including several unsuccessful transactions where the buyer walks away frustrated and exhausted. Owners are much better off hiring seasoned professionals and letting them do the heavy lifting. 

18. Expectations of a clean QoE report 

The quality of earnings (QoE) report is a routine step in the due diligence process for private acquisitions. Reported net income is not necessarily a 100% accurate indication of financial performance for a business. If a company uses generally accepted accounting principles, has accrual basis financial statements, and keeps its bookkeeping current, it should expect a clean QoE report. To learn more about QoE reports, read one of our related articles here.

19. Expectations of a clean due diligence process 

Sellers who feel confident that the due diligence process, including legal review, will not uncover any deficiencies need not worry about buyer repricing or having an unsuccessful transaction. On the other hand, when due diligence leads to the discovery of non-compliance regarding the Anti-Kickback Statute, Stark Law, and potential healthcare fraud and abuse issues, buyers might terminate the transaction process.

20. Choosing the right healthcare M+A advisor 

It’s imperative to work with a healthcare M+A advisor who keenly understands your business, the industry, and the marketplace of potential buyers and has a proven record of completing transactions similar to yours. With the right M+A advisor, the probability of a successful transaction increases significantly.

Will You Have a Successful Healthcare Transaction? 

Imagine if you had an opportunity to conduct a self-examination of the attributes listed above, applied to your situation/healthcare business, to determine the probability of closing your transaction. We’ve made that possible by providing you with a downloadable scoring spreadsheet, which can be accessed at Will You Have a Successful Healthcare Transaction. 

Fill out the checklist and then reach out to let us know how you scored. We’ll happily talk through your score and offer suggestions on what you can do to further strengthen the likelihood of a successful transaction in your future.

Volume 10 Issue 9, April 25, 2023

Once you've decided to sell your healthcare company, one of the biggest decisions you may need to make is which type of buyer you will choose. If your company attracts a variety of buyers, you're likely to have a choice between private equity (i.e., financial buyer), search fund, and/or strategic buyer. All generally have the same goals in mind, but approach deals in different ways. 

As M+A advisors, we at VERTESS are always being asked about the differences between these types of buyers. When selling your healthcare company, it's always a good idea to first determine your exit strategy. For example, are you wanting to just stay on during a transitional period and then hand the keys over to your business? Maintain rollover equity and actively continue to run the company? Answering these and related post-sale questions will help you better understand which type of buyer will best meet your needs in a transaction. 

Our main goals as M+A advisors are to make sure we get a deal across the finish line and achieve the best valuation possible while also ensuring the buyer is one our clients approve of. Transactions are much more than how much cash there is at close. Most transactions we are involved with see a seller net far more by having a mix of rollover equity, seller back financing, consulting agreement, and earnouts — opportunities that can vary based upon the type of buyer. 

With these objectives in mind, let's gain a better understanding of each of the three predominant buyer types you are likely to encounter when it's time to sell your healthcare business.

private equity

Private Equity

Also known as a funded or financial buyer, a private equity buyer will almost always keep the acquired company's current executive team in place. Private equity transactions tend to include rollover equity and seller back financing. Private equity groups (PEGs) will typically acquire and manage the business for 5-7 years and then sell the company for a profit. 

PEGs usually look for more mature businesses rather than startups. These buyers usually already have healthcare companies in their portfolio and may have companies related to/in subsectors of the companies they are looking to acquire. Furthermore, there are quite a few PEGs focused solely on healthcare. 

A few additional key points to know about PEG buyers: Most will lack extensive expertise in your company's area of focus. PEGs expect a certain return on their investment. They may use debt to finance the deal. They will also spend significant amounts of time scrutinizing prospective acquisitions, including financials, budgets, bank statements, audits, and much more. 

Search Fund

Also known as unfunded sponsors, search funds, unlike PEGs and strategic buyers, want to not only own but operate the businesses they acquire. A company's current CEO will no longer be managing or running their business post-acquisition. In a search fund transaction, there is typically a short transition period that includes some compensation for the seller. 

Search fund deals tend to be on the smaller side — too small for most PEGs to consider. Search funds are generally looking for businesses that have been profitable for at least five years and are growing. The upside of selling to a search fund is these investors or investment team tend to have vast knowledge and experience in a seller's space. Search funds look for companies with good potential for growth and healthy balance sheets. Search funds put investors' money to work, with active investors offering greater value to the business. 

A key point to know about search funds: They generally do not have the growth capital readily available at the time they make an offer for a company. Search funds typically work in these stages:

  1. Search for a company
  2. Make an offer to a company
  3. Secure the funding needed to make the acquisition
  4. Acquire the company
  5. Operate the company

When a search fund submits a letter of intent (LOI), it usually needs to secure funding during due diligence, mostly from private investors/and/or groups. Thus, transactions involving search funds are less successful than with other types of buyers that come to the table already with the adequate funding needed to complete a transaction. 

Unlike PEGs, there is no turnaround timeline following a search fund's acquisition. Search funds tend to hold on to assets much longer. 

Shaking hands

Strategic Buyers

These are typically what we call non-financial or "buy-and-build" buyers. Strategic buyers already operate in an adjacent market of a company they're considering buying. They tend to look for more well-established businesses rather than startups. They look predominantly at products and services rather than a company's financials and seek counterparts in other regions and better distribution channels. Strategic buyers want to boost their operations and add talent while achieving cost savings and synergies with existing assets. They look for economies of scale, with a mindset that two companies when combined will be of greater value than the sum of their parts.

Strategic buyers tend to pay a premium for companies they acquire because they net a greater value. Following a transaction, an acquired company can expect growing pains and loss of staff, possibly including leadership and particularly when there are overlapping (i.e., redundant) services. Strategic buyers always have their sights set on reselling companies in their portfolio at a higher value. 

Private Equity vs. Search Fund vs. Strategic: What Buyer Is Right for You?

In many healthcare M+A transactions, choosing the right type of buyer takes a fair amount of work. Working with an M+A advisor to determine your preferred exit strategy and optimal buyer type before listing the business is a great step to take and one that should greatly help get a deal across the finishing line. 

If you run a good company, finding a buyer is usually the easy part. Properly navigating the subsequent processes is crucial to achieving a successful outcome. Getting the deal closed requires much more time, effort, and expertise. At VERTESS, we have extensive experience working with all buyer types. We support our clients throughout the entire M+A process, including analyzing each prospective buyer and every LOI submitted. Even after you've chosen a buyer, our work doesn't end. Our team continues working with you and your new partner to help ensure a smooth transition and strong post-transaction collaboration. 

Reach out if you would like to learn more about how VERTESS has helped companies just like yours achieve a successful sale.

Volume 10 Issue 6, March 14, 2023

Over the past several years, we've seen a rapid rise in the number of new healthcare revenue cycle management (RCM) companies, existing companies launching RCM divisions, and transactions involving RCM companies. All three developments are tied to the greater demand for RCM services. Healthcare providers are turning to outsourced RCM to better ensure they are paid properly for services provided, reduce costs associated with full-time staffing or expensive part-time and overtime work, and decrease the amount of work and expenses associated with recruitment, retention, and management of internal revenue cycle staff, among other factors. 

One of the most effective ways for revenue cycle management companies to remain competitive and capture more of this growing demand for their services is to take on a strategic partner. The right strategic partner can provide the resources and expertise to help RCM companies overcome their obstacles to growth and taking advantage of new growth opportunities.  

Revenue cycle management companies unsure about whether to consider taking on a strategic partner will want to determine whether they are struggling to overcome challenges standing in the way of short- and long-term growth and competitiveness. If your RCM company is experiencing any of the following challenges, speak with a healthcare M+A advisor to determine if a strategic partner should be in your future.

Low annual growth. If your growth is limited to 2-5% annually, taking on a strategic partner may be essential. This percentage of growth is likely necessary to help offset rising costs and investments required to keep your business on solid footing — and that's on top of increasing expenses associated with inflation. 

Coding shortfalls. A significant challenge facing many revenue cycle management companies is finding and hiring coders with the knowledge and experience needed to support industries served. If an RCM company is short coders or has coders who are unable to effectively deliver timely, accurate coding, this will hinder the submission of clean claims and lead to increases in denials. The results: slower or loss of reimbursement, which can quickly lead to loss of clients due to dissatisfaction with the RCM company's performance. The right strategic partner may be in a position to fill in those coding talent gaps or at least provide support with finding and training coders and then ensuring staff are kept current on ever-changing rules. 

Inadequate marketing. Marketing for new business growth is one of the biggest and most time-consuming challenges RCM companies face. A strategic partner can help create and implement efficient and effective marketing strategies that will help drive this growth. These include developing campaigns that target potential customers, creating a comprehensive website, and leveraging various social media strategies to reach more prospectives clients. 

Inability to break into new business lines. A strategic partner can provide the resources and expertise to help RCM companies make the necessary connections to establish a foothold in new sectors and offer new services. A strategic partner can help an RCM company identify sectors and potential customers worth targeting, bring in the talent required to support these sectors and provide new services, develop a plan to reach out and connect with these customers, and create a strong value proposition. 

Missing capability. Some revenue cycle management companies achieve success but then find that getting to the next level of success is proving difficult because the company is lacking a specific capability. It may be missing personnel who could support a growing need of clients or provide services to a new client base. It may be missing technology that can help improve productivity and performance. It may be relationships with providers and/or payers in a new market. Taking on a strategic partner that can instantly fill a capability gap may be the most efficient and effective way to keep an RCM company's growth momentum going in the right direction. 

Outdated technology. The high cost of software and use of old technology can both present challenges for RCM companies. A strategic partner can help with identifying the best software and technology solutions to maximize efficiency and cost savings. The right partner with a strong grasp of the technology landscape can also help with researching and understanding the latest software and technology solutions, consulting with experts to determine the best solutions for the RCM company's needs, and implementing the solutions to ensure appropriate usage and maximize value. 

Staffing difficulties. Staffing challenges — both recruitment and retention — are facing RCM companies, just like they are many other types of business. A strategic partner can help an RCM company attract qualified personnel, provide training and support, develop a comprehensive onboarding process, identify potential opportunities to consolidate roles and perform cross-training, and strengthen strategies to help with staff loyalty and retention. 

Lack of a strategic plan. Owners of RCM companies are often too busy working to support existing clients and putting out fires to develop and execute a strategic growth plan. The right strategic partner can help RCM company owners reduce the number of fires and help with business growth by providing owners with the resources and expertise they need. This includes developing a business plan, creating a budget, and implementing strategies that maximize growth. 

Finding the Right Strategic Partner for Your RCM Company

In conclusion, partnering with the right strategic partner may be crucial for your revenue cycle management company to reach its goals, remain competitive, and continue growing. Finding a strategic partner that is a strong fit for your company today and tomorrow will likely require finding another type of partner: a healthcare M+A advisor.  

Partnering with an experience M+A advisor can help you identify options for good strategic partners, vet those partners, and complete a partnership that should benefit your RCM company over the short and long term. Please reach out to me or any member of the VERTESS team if we can help you better understand whether the time is right to consider taking on a strategic partner.

FORT WORTH, Texas, Jan. 4, 2023 /PRNewswire/ -- VERTESS, a leading healthcare mergers and acquisitions (M+A) advisory firm (https://vertess.com), recently welcomed Jonathan Hadley as their newest Managing Director. Jonathan brings with him a wealth of knowledge and experience in the medical device space after leading and growing the largest medical device service organization in North America, MSC Biomedical.

Jonathan served in various roles at MSC Biomedical, including CEO, and steered the company through a successful acquisition. This experience began his career in M+A, and he has not looked back. Through his time directing MSC Biomedical and shepherding business development under new ownership, Jonathan was able to work directly with medical device manufacturers, HME/DME providers, and former competitors as he executed upon a national network acquisition M+A strategy. He is excited to join the team and help other healthcare business owners venture down the same path he did.

VERTESS has enjoyed several successes in the med device market, particularly with the closing of 3B Medical, Inc. in 2021, and the recent VenTec Life System acquisition in 2022. "Bringing Jonathan onto our team was an easy decision. His extensive experience in med device allows us to continue our expansion into this critical and rapidly growing vertical," stated Brad Smith, Managing Director/Partner. "Jonathan's successes as a business owner and M+A specialist speak volumes about his value to any organization."

"I have been in the medical device space for most of my life. While it was exciting and rewarding to lead my own company, I believe I can offer much more as an advisor and consultant to other business owners," Jonathan commented. "It has been a pleasure to start collaborating with this amazing team!"

VERTESS is also pleased to announce the completion of the rigorous Certified Mergers & Acquisitions Advisor (CM&AA) (https://amaaonline.com/cmaa/) credentialing course by five team members. The CM&AA course is an educational course sponsored by the Alliance of Mergers & Acquisition Advisors (AM&AA) (https://amaaonline.com/) that outlines everything from middle-market M+A industry, trends, and tax implications to the structure of buyside and sellside deals, as well as valuation. Currently, VERTESS has 13 CM&AA professionals, including the newly minted CM&AA team members David Broussard, Anna Elliott, Kim Harrison, and J. Blake Peart. VERTESS offers each hearty congratulations on their success!

Jonathan Hadley can be reached directly at 351410@email4pr.com or +1(682)371-6867.

For questions about VERTESS, please contact Vaughne Glennie at 351410@email4pr.com or +1(520)395-0244.

Volume 9, Issue 26, December 21, 2022

It's been a wild ride for M+A activity in the healthcare space these past few years, with several significant global and domestic issues impacting deal flow. The effects of the COVID-19 pandemic will be felt for a long time. Russia's invasion of Ukraine has created global uncertainty. Domestic inflation has created cautious investors. Labor shortages have decreased profits for many providers.

All of these weighed down the healthcare space, yet it's estimated that of the $1.6 trillion in "dry powder" (i.e., unspent capital) globally, 15% is expected to be allocated to healthcare. And of that 15%, I expect a good percentage to go toward behavioral health.

Following the lull of transaction activity that affected all of healthcare in the first several months of the COVID-19 pandemic, the behavioral health space has experienced fairly steady transaction activity, including some large deals that had ripple effects throughout the space.

What's behind all this activity? Let's look at six of the biggest contributing factors.

1. Behavioral health providers are seeing the opportunity for consolidation and diversification to strengthen their market share. One of the reasons why: M+A internal rates of return have outperformed other markets for the last 10 years by approximately 6%. In addition, behavioral health providers understand that the pandemic has changed service delivery and pushed providers to embrace innovation more aggressively. For example, telehealth and value-based care now seem like they will be requirements for long-term success whereas neither, and certainly not telehealth, were on many providers' radars pre-2020.

2. The behavioral health industry is highly fragmented and attractive to investors due to its low overhead and recent history of improvements in reimbursement. Noteworthy improvements to behavioral health reimbursement began with the SUPPORT for Patients and Communities Act (SUPPORT). The bill is one of the most significant legislative overhauls addressing a substance abuse epidemic in recent history. SUPPORT has turned out to be a tailwind to the behavioral health industry — specifically those focused on the treatment of substance use disorders (SUD).

3. Changes to the coverage of medication-assisted treatment (MAT) have helped strengthen behavioral health providers' ability to treat more patients, which has also increased their bottom lines. All state Medicaid programs are required to cover MAT, including related counseling and behavioral health services, through fiscal year (FY) 2025. This requirement took effect in FY 2020.

We have also seen expanded access to MAT thanks to regulatory changes that increased the number of patients a physician or qualified practitioner can treat with MAT drug buprenorphine at any one time and looser restrictions on the types of providers who can prescribe MAT. The finalized 2023 Medicare Physician Fee Schedule (PFS) rule permanently extends the COVID-19 public health emergency (PHE) allowance for opioid use disorder treatment programs to begin MAT without buprenorphine via telehealth. The PFS also allows for providers to bill for services provided by licensed counselors and therapists, as well as mental health disorder and SUD treatment, under general supervision rather than direct supervision. This rule change will help increase capacity for treating more people, especially those with limited access to care.

4. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allocated $425 million to the Substance Abuse and Mental Health Services Administration to fund many initiatives, including the Certified Community Behavioral Health Clinic Expansion Grant program ($250 million), suicide prevention programs ($50 million), emergency response services in local communities ($100 million), and tribal and urban Indian health organizations ($15 million). This funding helped behavioral health providers financially recover from the effects of the COVID-19 pandemic and expand their services to help a population with growing behavioral health needs.

5. The ability to provide behavioral health services via telehealth has been a gamechanger for those providers that have established tele-programs thanks to regulatory changes that have made it financially worthwhile to offer virtual services. The 2019 SUPPORT Act allows telehealth treatment of SUD and cooccurring mental health disorders payable by Medicare without in-person visits.  

In early 2022, the Centers for Medicare & Medicaid Services (CMS) expanded and extended Medicare coverage for behavioral health-related telehealth services through the PFS, which was extended under the final 2023 PFS. Most notably, CMS permanently expanded coverage for the diagnosis, evaluation, or treatment of certain mental health disorders to include services delivered to beneficiaries located in their homes. CMS also permanently expanded coverage for audio-only telecommunications for mental health disorders when certain conditions are met.

6. In the past, facilities and providers could use an out-of-network (OON) strategy to receive higher reimbursement rates. With increasing regulatory pressures, it is becoming much more difficult to execute a successful OON practice. As providers move toward an in-network strategy, many existing providers are acquiring other in-network practices to leverage economies of scale and negotiate better rates with payors.

Behavior Health an Area Ripe for Investment

In years past, behavioral health services were considered "preventive" and often the first state/federal budget cut during difficult economic times. With the acknowledgement of the opioid pandemic, a spotlight on mental health and its effects on wellbeing, greater understanding and appreciation for how mental health affects physical health, and progress toward the de-stigmatization of therapy and behavioral health supports, this industry is seeing a significant transformation. COVID-19 not only shined a spotlight on the need for more and improved behavioral health care but also provided opportunities for providers to show how telehealth can help bridge the gaps of care. This perfect storm has created a rich opportunity for consolidation and investment in the behavioral health space.

FORT WORTH, Texas, Oct. 7, 2022 /PRNewswire/ -- Instant Care of Arizona, Inc. (http://instantcareaz.com), one of Arizona's largest non-medical, in-home care providers, was recently acquired by Texas-based Choice Health at Home, LLC (http://choicehealthathome.com), a multi-state provider of home health, hospice, private duty, and rehabilitation services. The transaction was facilitated by VERTESS (https://vertess.com), a leading healthcare Mergers + Acquisitions (M+A) advisory firm. The acquisition provides Choice entry into the Arizona market, as well as into attendant and personal care services.

Instant Care, headquartered in Phoenix, has been committed to providing its members and their families in Arizona the assistance needed to support daily activities and live as independently as possible since 2005. Services by caregivers include general daycare, housekeeping/chores, bathroom assistance/clean-up, meal preparation/feeding, errands, escorting, and shopping assistance.

Choice, headquartered in Tyler, TX, currently operates in Texas, Louisiana, Kansas, and Oklahoma. Choice was founded in 2008 as a rehabilitation service provider, entered home health in late 2012, and launched their hospice segment in 2018. In 2020, Choice partnered with Trive Capital and Coltala Holdings. The transaction is Choice's second in 2022 following a very active 2021. The company executed on 10 transactions in 2021 within the home health and hospice space further developing their Southwestern U.S. footprint.

Brad Scovil, former Instant Care Operating Manager, stated, "We could not be more pleased with the VERTESS team and their tireless efforts to find the right buyer for Instant Care.  We could not have successfully completed this transaction without their expertise and support. Choice was clearly the right partner to take Instant Care into the future and we are excited to see our company flourish under Choice's guidance."

VERTESS Managing Director Robert Villalobos commented, "Choice's culture and dedication to patient care aligned perfectly with that of Instant Care's. The strength of Choice's leadership team and successful track record of acquisition integration in home health and hospice were a pivotal decision factor when selecting the right buyer to continue the legacy of Arizona's premier homecare organization."

For more information, please contact Vaughne Glennie at 346206@email4pr.com.

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