Healthcare Business Exit Strategy

Volume 9, Issue 13, June 22, 2022

Numerous books, articles, webinars, and other media provide detailed exit planning strategies for healthcare business owners.  This article aims to provide owners with a concise primer on key actions to take and essential questions to answer that can help better prepare themselves and their healthcare businesses for an eventual exit.

Critical Steps for Exit Planning

Generally, exit planning encourages healthcare business owners to do the following:

• Determine the readiness of the business and the owner(s) to exit
• Attempt to maximize business value by identifying key value drivers and acting upon them
• Develop a plan to exit the business with the business continuing through new ownership and with sufficient resources to achieve goals and objectives
• Ensure the business maintains financial, civic, or other objectives
• Allow the business owner to fulfill their goals as closely as possible by realizing desired exit objectives

Let's first discuss the transferability of your healthcare business.  To improve transferability for an exit, owners should take steps to ensure that:

• Key employees will remain with the company after you leave
• All customer relationships remain intact post-sale
• Operating processes and technology can be passed on to the buyer
• Your replacement can readily step into your shoes
• Your proprietary intellectual property is adequately secured via trademarks, patents, licenses, etc.

In short, you need to be able to answer yes to the question confidently: Can the business run without you being there?

Key Value Drivers for Healthcare Businesses

The value of a business is a function of risk versus reward in the eyes of buyers.  As such, lowering perceived risks and increasing business cash flow increases the value of a business.

Let's look at a few key value drivers and questions owners should ask themselves in determining how buyers will view the value of their business.

Financial Performance

• How does your profitability compare to industry averages?
• What is your revenue trend line? Does your revenue growth match or exceed the industry average?
• What is the relative quality of your assets?
• Do you have clean books and regularly produce reliable, easy-to-read financial statements?
• Do you frequently rely on internally prepared financial statements in making decisions?

Process and Systems

• Are your internal processes consistent?
• Are your processes easily teachable and repeatable?
• Do you have systems in place to continuously focuses your team on maximizing the value of the business?
• Do you measure the performance of your internal processes?
• Do you periodically review/amend your processes to address vulnerabilities and achieve additional efficiencies?
• Do you attempt to automate processes when possible?

Organizational Strength

• Do you delegate authority/responsibilities when possible?
• Can you and your employees readily state the strengths of the business?
• Are those the right strengths for the continuity of the business?
• Is the supervisor's span of control optimal (i.e., number of subordinates per supervisor)?
• Do your supervisors have the needed skills to lead others?
• Do you have the right people in the right roles?
• Are you able to attract quality employees and retain them?

Business Dependency

• Do just a few customers make up most of your revenues?
• Are you, the business owner, dependent?
• Are you dependent on a few key suppliers?
• Is your company's success tied to one rainmaker employee?
• Is your business dependent on scarce technology?
• Are company revenues dependent on a few key referral sources?

Revenue Profile

• Do you have recurring revenues?
• Are revenues growing year over year?
• Do you face constraints to continued revenue growth?
• Are your historical revenues like a rollercoaster?
• Do you have a diverse payor mix?
• Do you have competitive advantages that support revenue and growth?

Market Conditions

• Aside from COVID-19, are there any known headwinds that could affect your business?
• Are there any new technologies that could impact your business?
• Are your local demographics favorable for growth?
• Is the overall economic outlook favorable for your business?
• Is your business somewhat recession-proof?

Growth Potential

• How scalable is your business?
• Can you increase growth through innovation?
• Are you able to add additional products or services to increase growth?
• Are you able to react quickly to new market opportunities?
• Are there untapped payors that could lead to increased revenue?

Depending on your exit time horizon, you may be able to impact all the above listed value drivers positively.  If so, you're on your way to maximizing your business's value while simultaneously reducing the riskiness of your business.

Exit planning and executing the plan can be a heavy lift, especially for owners fully engaged in the day-to-day operations of their businesses.  Most small businesses will not be sold but rather be liquidated after the owner decides to retire should motivate owners to plan their exit better.  I once heard an exit planning consultant exclaim that "exit planning is hard work because it's worth it."

Whether you're ready to exit your business now or plan to in the future, please consider containing one of the other Vertess Healthcare Advisors or me to discuss an exit plan.