Finding the ‘Sizzle’ in Your Human Services Organization
by Rachel Boynton, MBA, CM&AA, Managing Director
Volume 6 Issue 18, September 10, 2019
The world of mergers and acquisitions is often mired in data and numbers that can feel overwhelming. As such, when we engage with our new clients, the first thing we do is analyze their historical financial statements and point out their perceived financial strengths and weaknesses. Doing so gives us and our clients a keener understanding of the market demand for their company.
In years past, strong financial numbers were often enough to hook a qualified buyer. However, these days, buyers — especially those pursuing intellectual and/or developmental disability (I/DD), mental health, and substance use disorder treatment organizations — are looking for much more. They want to see if the organization has special qualities; something that stands out and will help propel the organization to new heights under new ownership. They are looking for the “sizzle.”
What does this mean if you are considering selling your business? You may feel strongly that your company is amazing. The challenge is proving it’s amazing to prospective buyers. Unfortunately, buyers are not going to just take your word when you tell them your company is great. You must show them what makes your company stand out; what makes the sizzle.
Here are seven characteristics that entice new buyers and that help drive up the valuation multiple on acquisition price offers.
For most companies, initial growth typically originates from its core business. As a business continues to grow, it’s important to diversify locations, services, and your funding sources.
This is a safety precaution more than almost anything else. If funding for one service is pulled or experiences cuts, the other funding source(s) can help you ride out the dip. You can shift resources and staff to the service line that will pay you while you wait to recover from the service line that declined.
Diversifying geographically can also create such a safeguard. Multiple service delivery locations typically mean a more diverse population served. Buyers like to see a large footprint that offers avenues for future growth. For example, if a buyer offers a service you don’t, your multiple locations will help them expand into new markets.
The ultimate goal is to contract with several different payors in a few different physical locations so you can pivot when necessary.
When you go to market, your earnings before interest, tax, depreciation, and amortization (EBITDA) may not be very large. In fact, some people go to market with a negative EBITDA. Although this is not the most desirable approach to selling a business, it is possible to receive a decent offer when one can demonstrate that most of the profit has been invested in generating new business.
For example, I worked with a company that provided residential home supports. The business model was to rent 4-5-bedroom homes and provide private rooms to persons in need of support. Each time the company filled a home, it needed to spend money to open a new home and then fill it. There goes a lot of the profit.
However, it was clear to see that if the company stopped growing (i.e., investing in new homes), the profit would easily grow because the business was well-established. Better yet, when we went to market, the company had a waitlist of people in need of its services. It was easy to show prospective buyers the path to greater profits.
I have worked with many for-profit human service providers who continue to work in a “non-profit mentality” of not discussing finances with key employees, especially matters concerning profitability. I think we can all agree that we are not working in this field to get rich; rather, we are focused on doing amazing things for the people we support and earning a living in the process.
But as I have told many of these business leaders, profit is not a bad word. In fact, it’s a vital issue when planning for the longevity and success of our organizations. Working towards a healthy profit margin will strengthen your position with banks (which can help keep you afloat through difficult financial periods) and new funding sources as well improve your organization’s financial situation so that you can better weather cuts, dips, and growth cycles.
As an industry, we must begin to run our businesses like businesses, not charities, and discuss the critical issue of profitability with our staff and stakeholders. After all, without positive margins, we can’t continue to provide services.
I recently read that mental health services are growing largely in part due to the increase in opioid use, destigmatizing of mental health and substance abuse, and parity legislation and implementation of healthcare reform. These factors probably did not factor into why most of you started your businesses. What they can now do for you is help sell your companies and services to those who aren’t aware of these industry drivers.
As a business owner, it’s important to know your industry, particularly where local, state, and federal agencies are allocating funding and resources. Buyers don’t always have that particular insight. Highlighting matters such as upcoming rate increases and beneficial regulatory changes will help strengthen your market position.
Your essential employee bench is an important component of your business. Prospective buyers are looking for answers to many questions, such as: How valuable is your senior membership? How long have they been with the organization? What is their turnover rate? Will they stay following a sale?
We all know retention of direct care staff is an industry pain point, so most buyers will understand if you’re keeping pace with the national average. However, if you can demonstrate that your senior team member turnover rate is lower than average or that a healthy percentage have stayed with your organization for a long time (thus demonstrating company loyalty), this can help add sizzle.
Most buyers are not interested in re-staffing your organization. Furthermore, they understand the value of trusted employees for continuing your company’s mission.
6. Consumer Loyalty
I once asked a buyer (for a seller) if it was more important that a seller has high, growing revenue with slim-to-no EBITDA because of growth or slowed growth that showed a strong bottom line. The buyer’s answer was very telling. He said it depended on the longevity of the new business. He appreciated that this seller was taking a lot of emergency placements and growing because of the ability to respond to demand quickly, but was the seller able to retain these placements and keep the business or were they more one-and-done services? Another way of looking at this: How long have you been providing services to the same people? Are the individuals you support loyal to the organization? Client (brand) allegiance is a quality that buyers want to see in acquisition targets.
Some services are short term in nature, thus making it more difficult to prove loyalty. In these situations, one way to demonstrate loyalty is to collect data on satisfaction with services and referrals made by those who have received services. If referrals tend to come from a certain school or doctor’s office, how often are you receiving repeat referrals? Collecting information on where your business is coming from can be a valuable metric when striving to show loyalty.
7. Best Practice
When I started my IDD company with my husband, it was clear that our funding sources all had expectations for quality and compliance, so we focused on those requirements for policies and procedures. It wasn’t until we pursued national accreditation that I understood the many facets that compose a robust quality assurance (QA) program and a compliance plan.
Accreditation can be costly and time-consuming, which is why I often suggest that owners implement the standards required for achieving accreditation as a starting point. A nationally recognized accreditation body that specializes in your particular services (e.g., Council on Accreditation, Commission on Accreditation of Rehabilitation Facilities) will mandate that you meet best-in-practice requirements for your formalized processes and procedures. Such standards are often important to buyers because QA and compliance programs involve policies, procedures, committees, and practices designed to protect the business by formalizing, implementing, and tracking quality and compliance.
A commitment to developing and maintaining these programs demonstrates to buyers that an organization is dedicated to minimizing risk, setting goals, gathering feedback, and implementing improvements.
Show Your Sizzle, Get the Steak
An organization’s sizzle will often mean something different to each person who assesses the company. When representing a seller, we are often first approached by a buyer’s lead development person who will look at the overall picture to decide if the company fits the acquisition profile. Once the diligence process starts, the buyer’s lawyers will seek highlights concerning compliance efforts; quality of earnings accountants will evaluate accounting and growth potential; and the operations teams will assess staff performance and business opportunities. Each will be looking for their version of the sizzle.
Some buyers are comfortable purchasing a floundering company if they believe they have the ability to save a sinking ship. But they are certainly not going to pay a premium for a turnaround project. They might even try to take advantage of the perceived weakness and offer to take the company “off your hands.” Although none of the characteristics discussed in this column are likely to be “deal makers” for buyers, if you work to strengthen even a few of the characteristics, you will enhance your market position, quality of services, and corporate culture. With more sizzle, you will put yourself in a better position to ask for a higher EBITDA multiple and justify why your company is well worth it.