By: Kevin Maahs, CM&AA and David E. Coit, Jr., DBA, CVA, CVGA, CM&AA, CBEC, CAIM
Market demand for veterinary practices is currently very robust. Both strategic and financial buyers are eagerly acquiring private veterinary practices throughout the United States. This increased interest and transaction activity has prompted a similar increase in owners of veterinary practices reaching out to VERTESS to inquire about the current market value of their businesses.
In this article on veterinary practice valuations, "veterinary practices" include clinics, service providers, and hospitals. Before we discuss veterinary practice valuations, it's helpful to take a closer look at what's causing the increase in the demand for these companies.
Rise in Veterinary Practice Transactions
Veterinary practices are considered safe, lucrative, and generally recession-proof investments. Companion animal practices provide cash flow diversity, appealing to private equity and strategic buyers. Veterinary data is valuable for future consumer engagement and marketing. According to HealthforAnimals.org, pet ownership rates — approximately 70% of U.S. households, 60% of United Kingdom households, and 50% of European households — surged during COVID-19 lockdowns. Remote work has fostered stronger pet-owner bonds, boosting spending on products and veterinary services.
According to The North American Pet Health Insurance Association, rising veterinary costs drive pet insurance demand, with this market seeing about 17% growth in North America and more than 6 million insured pets in 2023. Regular checkups, vaccinations, and treatments create stable income for practices. Consolidation opportunities allow larger players to gain economies of scale and regional dominance.
Key Veterinary Practice Value Drivers
To better understand the current value of veterinary practices, let's begin with discussing some of the key performance indicators that buyers are looking for when evaluating potential practice acquisitions.
Key value drivers include the following:
Specialty areas. Shelter medicine, reptile and amphibian, exotic companion mammal, and equine are but a few of the American Veterinary Medical Association's (AVMA) 48 recognized specialties. Specializations create competitive advantages and barriers to entry. Specialization provides an opportunity to offer better treatments and more focused care for complex animal health problems. Specialization also allows practitioners to become experts in their chosen specialty, which fosters enhanced referral relationships. Specialty veterinary practices typically enjoy higher profit margins.
Location. Veterinary practices in urban and affluent areas typically enjoy higher profit margins than rural ones. Lower competition in an area enhances one's client base and revenue. Demographics and income levels of clients influence overall financial performance. Loyal clients with frequent pet care needs create value for the practice. Higher competition diminishes value by reducing the client base and growth opportunities. Areas with little or no competition typically achieve premium valuations.
Facilities, services, staffing, and operations. Modern, well-maintained facilities attract higher valuations. Proprietary or advanced equipment adds a competitive edge. Companies with specialized services, like surgery, or a focus on small animals are in high demand. Diversified services increase appeal and revenue potential. Experienced, qualified, and sufficient staff improve valuation. Practices with multiple veterinarians are more attractive than solo operations. Effective systems for inventory, scheduling, and financial management support profitability. Organized financial records make valuations easier and more favorable. Compliance with licensing and legal requirements affects credibility. Non-compliance significantly devalues a practice.
Staff compensation and turnover. According to IBISWorld, the average cost of wages (not including owner compensation) was 36.7% of revenue. While the percentage of salaries and wages is important, so is employee turnover. Although tenured employees typically receive 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).
Pet Insurance. Practices that accept insurance realize higher annual revenue, all other things being equal. According to the AVMA, revenue per patient was 92% higher for insured dogs than uninsured dogs. Moreover, after three years, 81% of insured dogs were at the same clinic compared with 46% of uninsured dogs.
Finally, relative size also matters regarding the market value of veterinary practices. There is a greater appetite for higher revenue, multi-doctor, multi-location veterinary practices. The greater appetite leads to higher offers.
Veterinary Practice Buyer's Industry Considerations
Astute buyers carefully evaluate the risks and rewards associated with acquiring a company. The following key veterinary industry trends significantly influence risk:
Profitability. Buyers prioritize profitability, typically looking at earnings before interest, taxes, depreciation, and amortization (EBITDA) margins as a key metric. Well-run veterinary practices should enjoy an EBITDA margin of 15% to 20% of total revenue. Address high costs (e.g., cost of goods sold (COGS)) or low daily transactions (i.e., average daily turnovers (ADTs)) to improve profitability. Reinvestments should provide measurable return on investment (e.g., equipment like surgical lasers must be utilized effectively). Higher revenue and patient volume indicate strong value.
Number of practitioners. Multi-veterinarian practices are preferred for risk mitigation. Single-doctor practices or those reliant on part-time/relief veterinarians are at higher risk. Revenue generation should not rely heavily on one veterinarian. A balanced patient load across doctors is more attractive to buyers.
Turnover and culture. High turnover of veterinarians or staff raises concerns for buyers. A positive workplace culture eases transitions to new ownership. Proper staffing helps ensure growth and operational efficiency.
Equipment quality. Outdated or poorly maintained equipment reduces practice value. Buyers consider upgrade costs when determining purchase price.
Differentiators. Specialty practices often command higher valuations due to premium services. Modern facilities enhance the practice's competitive edge.
Location. Rural practices face challenges but can thrive with limited competition. Practices in areas with populations exceeding 100,000 are highly desirable. Accessibility, population demographics, and affluence significantly impact value.
Economic conditions. Developments like recessions or booms affect client spending and practice valuation. Resilience to inflation and interest rates is a key factor.
Growth plans. Buyers look for veterinary practices with plans to expand services, increase pricing, and/or develop repeat business. Growth potential signals long-term profitability.
Current Veterinary Practice Valuations
Below is a breakdown of what we at VERTESS calculate as the current estimated market values for veterinary practices based on multiples of adjusted EBITDA; seller's discretionary earnings (SDE), which is EBITDA plus owners' salary(ies) and bonus(es)); and percentages of annual revenue, by revenue size:
Market Valuation*
Annual Revenue$2M to $5M$5M to $10M$10M to $50M$50M+
Multiple of Adjusted EBITDA 4.0x to 6.0x 6.0x to 8.0x 8.0x to 10.5x 10.5 to 13.5x
Multiple of Adjusted SDE 2.5x to 4.5x 4.5x to 7.5x 7.5x to 9.5x 9.5x to 12.0x
Multiple of Annual Revenue 65% to 85% 85% to 100% 100% to 125% 125% to 145%
A well-performing veterinary practice should have an adjusted EBITDA margin of 14.0% to 15.0%, or an SDE margin of 15.5% to 16.5%. As such, a well-performing veterinary practice with $6 million in annual revenue would have a market valuation range of between $5.9 million to $6.2 million.
Note: The above valuation does not include real estate, which must be appraised separately from the practice.
The actual market value is also a function of the (1) quality of offering memorandum and reporting, (2) quality of intermediary representation, (3) historical financial performance of the company, (4) future growth prospects of the company, (5) quality, type, and number of potential buyers, (6) current and projected macroeconomy, and (7) current and projected industry stability and growth, and numerous other factors.
There are outlier market multiples in unique veterinary 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.
Acquisitions of veterinary practices are typically asset purchases, as opposed to equity purchases, and are done on a cash-free/debt-free basis. Sellers typically distribute excess cash balances prior to closing the sale and after paying off all outstanding indebtedness.
What Is Your Veterinary Practice Worth?
If you're an owner of a veterinary practice, you can receive a market valuation from VERTESS regardless of whether you're considering selling your business. Knowing your current market valuation can provide insight into determining your go-to-market plans. Perhaps you're contemplating whether to sell now or five years from now. A good roadmap begins by knowing where you are today. A market valuation of your veterinary practice is a great start to planning for your future.
As a healthcare-focused M&A firm, we at VERTESS help owners understand the expected value of their business if they are to bring their company to market. We'd be happy to provide you with a current market valuation of your veterinary practice.
Kevin Maahs, CM&AA
As a seasoned entrepreneur with 12 years of experience owning and operating a durable medical equipment company specializing in urological and power mobility, I have developed a deep understanding of the industry and the complexities of running a successful business. In 2021, I achieved a significant milestone by successfully selling my business, a process facilitated by the expertise and guidance of Vertess.
Navigating the sale of a company can be one of the most challenging and emotional journeys for any business owner. However, with Vertess’ unwavering dedication, meticulous attention to detail, and seamless process, my experience transitioned from stressful to highly rewarding. This transformative experience ignited my passion for helping other entrepreneurs achieve their goals and maximize the value of their businesses.
Today, I am excited to leverage my firsthand experience and insights to support business owners in navigating the complexities of selling their companies, helping them turn what can be a daunting process into a fulfilling and successful endeavor.
David E. Coit, Jr., DBA, CVA, CVGA, CM&AA, CBEC, CAIM
I am a seasoned commercial and corporate finance professional with over 30 years of experience. As part of the VERTESS team, I provide clients with valuation, financial analysis, and consulting support. I have completed over 400 business valuations. Most of the valuation work I do at VERTESS is for healthcare companies such as behavioral healthcare, home healthcare, hospice care, substance use disorder treatment providers, physical therapy, physician practices, durable medical equipment companies, outpatient surgical centers, dental offices, and home sleep testing providers.
I hold certifications as a Certified Valuation Analyst (CVA), issued by the National Association of Certified Valuators and Analysts, Certified Value Growth Advisor (CVGA), issued by Corporate Value Metrics, Certified Merger & Acquisition Advisor (CM&AA), issued by the Alliance of Merger & Acquisition Advisors, and Certified Business Exit Consultant (CBEC), issued by Pinnacle Equity Solutions, and Certified Acquisition Integration Manager (CAIM), issued by Intista. Moreover, the topic of my doctoral dissertation was business valuation.
I earned a Doctorate in Business Administration from Walden University with a specialization in Corporate Finance (4.0 GPA), an MBA from Keller Graduate School of Management, and a BS in Economics from Northern Illinois University. I am a member of the Golden Key International Honor Society and Delta Mu Delta Honor Society.
Before joining VERTESS, I spent approximately 20 years in commercial finance, having worked in senior-level management positions at two Fortune 500 companies. During my commercial finance career, I analyzed the financial condition of thousands of companies and successfully sold over $2 billion in corporate debt to institutional buyers.
I am a former adjunct professor with 15 years of experience teaching corporate finance, securities analysis, business economics, and business planning to MBA candidates at two nationally recognized universities.
The healthcare revenue cycle management (RCM) sector is experiencing record merger and acquisitions (M&A) activity. At VERTESS, we are seeing private equity firms and strategic acquirers aggressively pursuing acquisitions of RCM companies big and small, with increased interest in those companies that offer artificial intelligence (AI)-driven automation, scalable technology, and strong financial performance. As healthcare providers struggle with rising administrative costs, payer rules, and increased patient financial responsibility, there is heightened demand for efficient, technology-enabled RCM solutions.
For healthcare RCM business owners considering an exit, 2025 presents a prime opportunity to sell at what could be a premium valuation. However, not all RCM businesses are equally attractive to buyers. The most valuable companies are those with qualities like recurring revenue, automation-driven efficiencies, a diverse client base, and strong earnings before interest, taxes, depreciation and amortization (EBITDA) margins.
Whether you're looking to sell your RCM business in the next 12-24 months or want to position it for future growth, understanding the current market and what buyers are looking for are essential.
Overview of the Healthcare Revenue Cycle Management Market
Over the past several years, the healthcare RCM market has experienced significant consolidation, and there's no indication this momentum will slow down soon. Consolidation is being driven by a variety of factors, such as increased financial pressures on healthcare providers and a shift toward technology-driven solutions. The ongoing complexity of reimbursement, rising out-of-pocket costs, and administrative inefficiencies are among the reasons that have elevated demand for automation, interoperability, and outsourced RCM services.
Private equity and strategic acquirers have increasingly focused on business-to-business (B2B) RCM solutions while largely avoiding direct-to-consumer healthcare segments, as these have struggled more with inflation coupled with consumer spending challenges. The B2B RCM market has experienced strong M&A activity, with the middle market attracting competitive valuations and a record number of private-equity-led platform acquisitions.
5 Key Trends Driving Healthcare RCM M&A Activity
Here are five of the trends that we're seeing as significant factors contributing to the elevated interest in healthcare RCM companies.
1. AI and automation reshaping RCM It's clear that the adoption of AI and automation is transforming the RCM landscape, with 98% of healthcare organizations indicating they have implemented or are planning to implement AI strategies to enhance efficiency and financial performance. AI-powered automation has become more integral to coding, claims processing, and eligibility verification, significantly reducing manual errors and administrative burdens.
The increasing reliance on AI has driven a surge in RCM M&A activity, with AI-driven RCM transactions representing 21% of deals in early 2023, compared to 11%-12% in prior years. Major acquisitions highlight this trend, including CloudMed's $4.1 billion acquisition by R1 RCM, with CloudMed having optimized reimbursement workflows using AI, and Apixio's acquisition by New Mountain Capital, with Apixio having leveraged AI-powered risk adjustment and analytics to improve financial outcomes.
2. Private equity firms leading the RCM buyout boom Private equity firms are the dominant force in healthcare RCM M&A, with nearly half of healthcare information technology (IT) transactions in 2024 involving private equity buyers. This figure marks a 20% year-over-year growth. Investors are aggressively pursuing buy-and-build strategies, acquiring smaller, specialized RCM firms and integrating them into scalable platforms to enhance value.
Noteworthy transactions include Francisco Partners' $1.1 billion acquisition of AdvancedMD, which expanded its cloud-based practice management and RCM software capabilities, and Petal Solutions' acquisition of Medcom Billing Systems, which strengthened its medical billing automation portfolio. Additionally, Elevate Patient Financial Solutions, backed by Edgewater and Frazier Healthcare, acquired NYX Health Eligibility Services, reinforcing its Medicaid-focused RCM solutions.
3. M&A valuations remain strong RCM companies continue to command high valuations, particularly in the middle market, where competition among investors is fierce. From 2021 to 2024, the average enterprise value (EV)/revenue multiple for RCM deals reached 6.1x, significantly outpacing the 4.4x average from 2018 to 2020. The middle market — transactions under $500 million — has been particularly active, making up more than 80% of sector deals in 2024 as both private equity firms and strategic acquirers compete for companies with highly desirable qualities like recurring revenue models, scalable technology, and strong contract structures. The combination of predictable cash flows and growing demand for AI-driven automation has positioned healthcare RCM as one of the most sought-after healthcare IT investment categories.
4. Consolidation of RCM technology firms The healthcare RCM market remains highly fragmented. This provides a strong M&A pipeline for platform acquisitions and roll-up strategies. Large healthcare IT vendors are actively acquiring RCM firms to integrate AI, automation, and risk adjustment tools into their solutions rather than building in-house capabilities. Industry leaders, such as Waystar, R1 RCM, and Epic, are expanding their product offerings in an effort to enhance revenue cycle efficiency and reduce administrative complexity. The scale of consolidation is further evident in Clayton, Dubilier & Rice and TowerBrook Capital Partners' $8.9 billion take-private acquisition of R1 RCM. This deal reinforced the attractiveness of end-to-end RCM platforms.
5. B2B healthcare RCM platforms outperforming direct-to-consumer healthcare IT As referenced earlier, B2B healthcare RCM platforms have become the preferred investment target compared to direct-to-consumer healthcare IT. B2B healthcare IT transactions accounted for about 72% of total sector deals in 2024, reflecting a more than 24% year-over-year increase. In contrast, direct-to-consumer healthcare IT companies (e.g., telehealth providers) saw a nearly 29% decline in deal volume due to issues including market saturation and economic pressures.
Private equity and strategic acquirers are prioritizing B2B RCM vendors with qualities like high customer retention, scalable software, and mission-critical revenue cycle capabilities. The shift toward enterprise-focused, technology-driven revenue cycle solutions reflects broader trends in healthcare IT, where automation, interoperability, and financial optimization are paramount.
5 Key Focus Areas for Healthcare RCM Business Owners Preparing for an Exit in 2025
Now let's look at five areas healthcare RCM business owners should focus on if they are planning for or considering a sale of their company this year.
1. Strengthening recurring revenue and contract stability Buyers, especially private equity firms and strategic acquirers, prioritize healthcare RCM businesses with predictable, recurring revenue streams and long-term client contracts. Owners should work to secure multi-year contracts with providers, payers, and health systems as this will help demonstrate revenue stability. Reducing customer churn and increasing contract renewal rates will enhance valuation and make the business even more attractive to investors. In addition, implementing tiered pricing models, value-based pricing, and/or bundled service agreements can further solidify revenue predictability and enhance the appeal of the company.
2. Investing in AI and automation for operational efficiency With AI-driven automation playing an increasingly pivotal role in healthcare RCM M&A, owners should be working to ensure their business integrates the likes of AI-powered coding, claims processing, and denial management solutions. We are seeing investors being particularly drawn to scalable, tech-enabled RCM platforms that improve financial outcomes for providers.
Partnering with companies that offer solutions or developing AI-enhanced revenue intelligence tools can differentiate the business while improving EBITDA margins, which will then increase deal value. Companies lacking AI capabilities may struggle to compete in a market where automated, data-driven decision-making is quickly becoming the standard.
3. Expanding market reach and diversifying client base Client diversification reduces risk and increases buyer appeal. Owners should look for ways to expand into high-growth verticals like behavioral health, dental, ambulatory surgery centers, dermatology, and physical therapy, where RCM services are in demand. Reducing client concentration risk — where a few large customers contribute to a disproportionate share of revenue — will be critical in maximizing valuation.
Additionally, broadening payer mix to include commercial insurance, Medicare, Medicaid, and value-based care arrangements can strengthen revenue resilience. Healthcare RCM businesses that serve a diverse client base across multiple provider specialties and geographies tend to attract stronger acquisition interest and achieve elevated multiples.
4. Optimizing financial performance and profitability Potential buyers closely evaluate key financial metrics like gross margins, EBITDA, and revenue growth trends. RCM business owners should focus on improving their cash flow efficiency, reducing days sales outstanding (DSO), and increasing clean claim rates to enhance financial performance. Streamlining internal operations through automated billing, outsourcing non-core functions, and implementing AI-driven collections processes can drive margin expansion.
5. Building a strong management team and scalable infrastructure Investors look for businesses with experienced leadership teams and scalable infrastructure that can support rapid growth post-acquisition. Healthcare RCM owners should invest in hiring (if needed) and retaining top RCM talent, strengthening their compliance teams, and ensuring strong leadership succession plans are in place. A well-prepared management team with clear growth strategies and efficient back-office operations will increase buyer confidence and valuation.
Additionally, maintaining a robust technology stack with interoperable solutions that integrate easily with electronic health record (EHR) systems, payer platforms, AI tools, and other solutions will improve operational scalability.
As M&A activity in the healthcare RCM sector continues to surge, business owners who proactively position their companies for an acquisition will have the greatest opportunities for a profitable exit. Whether you're looking to sell now or in the next few years, the key to securing multiple, realistic offers for your company and maximizing valuation is ensuring that your business meets the criteria today's investors are actively seeking — from AI-driven efficiencies and revenue stability to strong EBITDA and a scalable management team.
At VERTESS, we work exclusively with healthcare business owners to help them strategically prepare for an exit, negotiate the best possible deal, and achieve a successful and smooth post-transaction transition. Our deep relationships with private equity firms, healthcare IT investors, and strategic acquirers allow us to connect healthcare RCM company owners with the right buyers at the right time — better ensuring that they receive the highest valuation for their business.
Additional sources: Pitchbook, Bain and Co.
Jack Turgeon, MBA
As a Managing Director at VERTESS, I bring extensive experience in sales, consulting, and project management from early-stage startups. With an MBA from Babson College, I have a strong foundation in business strategy, operations, and financial analysis. My personal connection to behavioral healthcare through a family member motivates me to help business owners get the best deal possible while ensuring high-quality care for their clients. Throughout the M&A process, I provide comprehensive support at every step. I have a proven track record in negotiations and client management after working with companies in various industries. I’m excited to join VERTESS and make a meaningful impact on the lives of the owners I work with.
We can help you with more information on this and related topics. Contact us today!
By: David E. Coit, Jr., DBA, CVA, CVGA, CM&AA, CBEC, CAIM
Ambulatory surgery centers (ASCs) are a hot commodity, attracting increased interest from hospital and health systems, surgical facility operators (e.g., Surgery Partners, SCA Health), private equity firms, and commercial payers. Given this increased interest from strategic and financial buyers, it's not surprising that we are hearing from a growing number of ASC owners wondering about the value of their facilities.
Before we dive into the factors influencing ASC value and discuss surgery center valuations, it's helpful to get a lay of the ASC land. The massive changes in ASC scale and scope in recent years continue to propel growth but also bring challenges. A larger number of ASCs are performing a broader set of procedures than ever, including the likes of total joint replacements and a variety of cardiovascular treatments, but labor shortages, inflation, and reimbursement pressures are hurting their ability to increase profitability.
Outpatient care will continue shifting away from inpatient (e.g., hospital) settings toward ASCs. Evolving medical and technology advances will further accelerate the transition as patients seek safe, affordable care and payers look to reel in rising healthcare costs. The rise in the number of ASCs to the point where the number of Medicare-certified surgery centers (~6,400) has surpassed the number of hospitals (~6,100) is in part due to the significant cost savings of procedures performed in ASCs compared to onsite hospital surgeries, which allows for lower reimbursement rates and patient expenses. The migration of care into ASCs, fueled by payer pressures, is one the reasons many hospitals are seeking to develop or partner with ASCs. Consulting firm Avanza Healthcare Strategies notes that more than 7 out of 10 hospitals and health systems intend to continue investing in and affiliating with ASCs. The trend is up 8% since 2019, with the firm attributing the shift to many factors, including consumer demand and the need to decrease costs. Physicians remain interested in starting ASCs or becoming minority or majority owners to allow them to obtain distributions.
Key ASC Risk Drivers
Similar to most investable assets, the value of ASCs is a function of risks versus rewards. Key risk drivers include:
Location: Being located in a certificate of need (CON) state and/or being located near key suppliers, solid referral sources, ample labor supply, low concentration of other ASCs, and good patient demographics are all positives.
Payers: Having low reliance on out-of-network payers is preferable.
Reimbursement: Having low dependence on procedures with low reimbursement rates helps reduce risk.
Operational dependence: Having high reliance on one physician, one referral source, or one senior executive who would cause a dramatic decline in revenue if they were to leave the ASC raises risk.
Non-competition/non-solicitation agreements: Having little concern that employees or independent contractors would leave the ASC and immediately become a competitor or would steal away key employees reduces risk.
Multi-specialty vs. single-specialty ASCs: Multi-specialty ASCs that have a low concentration of services/procedures provided relative to total revenue are considered less risky than single-specialty ASCs.
Other issues impacting the riskiness of a particular ASC include:
Performance: The overall performance of an ASC relative to its peers/competitors. An ASC that historically underperforms its peers will be viewed as more risky than one that at least performs as well as like facilities.
Historical legal issues: Legal fees will impact valuations via lower profitability, while a history of numerous legal issues will increase buyers' perception of riskiness.
Turnover: An ASC with relatively high employee, patient, and/or referral source turnover will be looked at as more risky than otherwise.
Collections issues: An ASC with a history of billing/collections issues, high reimbursement denials, longer than normal collection periods, and higher than normal write-offs for uncollectable accounts receiable (A/R) will be deemed riskier than normal.
Malpractice claims history: An ASC with numerous malpractice claims may lead buyers to increase their perception of riskiness.
Patient readmissions: An ASC with an above-average hospital readmission rate will increase buyers' perception of riskiness.
Compliance: An ASC with a history of regulatory compliance, accreditation, and/or licensure issues will be deemed more risky.
Some people might argue that the above-listed risk drivers are qualitative matters rather than quantitative. In reality, these risk drivers ultimately impact overall performance and are therefore quantitative relative to creating cash flow for the owners/investors of the ASC.
Relative size also matters regarding the market value of ASCs. There is higher demand by buyers for ASCs with higher revenue and organizations with multiple locations. Higher demand will lead to higher valuations.
Current ASC Valuations
Let's discuss ASC valuations. Below is a breakdown of the current estimated market values based on multiples of earnings before interest expense, income taxes, depreciation, and amortization (EBITDA) of ASCs by size and perceived riskiness:
Market Valuation*
Annual Revenue<$15 million$15 to $30 million>$30 million
Low-risk ASCs 4.0x to 4.5x 4.5x to 6.0x 6.0x to 8.0x
Moderate-risk ASCs 3.5x to 4.0x 4.0x to 5.5x 5.5x to 7.5x
High-hisk ASCs 2.5x to 3.5x 3.0x to 4.0x 5.0x to 5.5x
For example, a low-risk ASC with $9.0 million in annual revenue and an EBITDA of $1.8 million (20.0% EBITDA margin) will have a market value in the range of $8.1 million to $10.8 million.
*Actual market value is also a function of (1) quality of offering memorandum and reporting, (2) quality of intermediary representation, (3) historical performance of the company, (4) future growth prospects of the company, (5) quality, type, and number of potential buyers, (6) current and projected macroeconomy, (7) current and projected industry stability and growth, (8) and numerous other factors.
Note that acquisitions of ASCs are typically stock purchases, as opposed to asset purchases, and are done on a cash-free/debt-free basis. The seller(s) normally distribute their cash balances before closing the sale/purchase and after paying off all indebtedness.
Buyers typically undertake a Quality of Earnings (QoE) analysis. A QoE is a comprehensive examination of a company's financial performance, detailed revenue analysis, review of accounting policies, assessment of company management, examination of company operations, and reliability of financial reporting. We often recommend that ASC owners undertake a seller's QoE before going to market. By doing so, owners can take steps to mitigate issues uncovered during the QoE process, thereby reducing perceived riskiness.
Moreover, the QoE process helps sellers and their mergers and acquisitions (M&A) advisor to better identify discretionary and non-recurring expenses that are add-backs to EBITDA to best reflect the cash flows generated by the ASC to potential buyers.
What Is Your ASC Worth? Receive a Market Valuation From VERTESS. Whether or not you're considering selling your ASC, knowing the current market valuation can provide you insight into deciding where to go. You might be trying to determine where you want your ASC to be five years from now. A good roadmap begins by knowing where you stand today. A market valuation of your ASC is a great start to knowing where you are now.
As a healthcare-focused M&A firm, we at VERTESS help owners understand the expected value of their business if they are to bring their company to market. We'd be more than happy to provide you with a current market valuation of your ASC.
David Coit DBA, CVA, CVGA, CM&AA, CBEC, CAIM
I am a seasoned commercial and corporate finance professional with over 30 years of experience. As part of the VERTESS team, I provide clients with valuation, financial analysis, and consulting support. I have completed over 400 business valuations. Most of the valuation work I do at VERTESS is for healthcare companies such as behavioral healthcare, home healthcare, hospice care, substance use disorder treatment providers, physical therapy, physician practices, durable medical equipment companies, outpatient surgical centers, dental offices, and home sleep testing providers.
I hold certifications as a Certified Valuation Analyst (CVA), issued by the National Association of Certified Valuators and Analysts, Certified Value Growth Advisor (CVGA), issued by Corporate Value Metrics, Certified Merger & Acquisition Advisor (CM&AA), issued by the Alliance of Merger & Acquisition Advisors, and Certified Business Exit Consultant (CBEC), issued by Pinnacle Equity Solutions, and Certified Acquisition Integration Manager (CAIM), issued by Intista. Moreover, the topic of my doctoral dissertation was business valuation.
I earned a Doctorate in Business Administration from Walden University with a specialization in Corporate Finance (4.0 GPA), an MBA from Keller Graduate School of Management, and a BS in Economics from Northern Illinois University. I am a member of the Golden Key International Honor Society and Delta Mu Delta Honor Society.
Before joining VERTESS, I spent approximately 20 years in commercial finance, having worked in senior-level management positions at two Fortune 500 companies. During my commercial finance career, I analyzed the financial condition of thousands of companies and successfully sold over $2 billion in corporate debt to institutional buyers.
I am a former adjunct professor with 15 years of experience teaching corporate finance, securities analysis, business economics, and business planning to MBA candidates at two nationally recognized universities.
We can help you with more information on this and related topics. Contact us today!
In the business world, the concept of the "second bite of the apple" refers to a business owner retaining some ownership of their company (i.e., rollover equity) following a sale to a strategic partner and then the owner earning another payment when the strategic partner sells the company. Thus, the mergers and acquisitions (M&A) meaning of the "first bite of the apple" is when the owner initially sells the majority of their company to a strategic partner.
However, I would argue that defining the bites of the apple in this manner overlooks a lot of the details of the owner's journey to this point in the life of their business. Another way to look at these bites is that the first bite of the apple occurs when an owner starts their business. This bite can be bittersweet. It involves joy, worry, sadness, and the many difficulties that business owners typically will experience and endure on their ownership journey. The second bite of the apple is when the owner capitalizes on their hard work through a sale, leading to a more comfortable retirement or enabling the owner to pursue another venture — all because of the effort and hard work that went into building a successful first company.
To capitalize on the metaphors described and maximize the enjoyment of the second bite of the apple requires getting the first bite right. When starting a business, there are a number of decisions an owner will need to make outside of determining what services the company will provide. Let's look more closely at a few of the most important ones and what new business owners need to know about them. Note: While missteps concerning these decisions are not uncommon, owners that recognize and address their mistakes can better ensure their second bite is as sweet as it can be.
Debt
All new businesses take on debt. Be precise and strategic about how you take on this debt. Ensure the debt does not over leverage your business and can be paid even if revenue declines due to normal deviations. You do not want to compromise your ability to maintain credit and compromise your working capital. To elaborate further, if you rent a building or office space, one of the most important considerations is whether the cost fits your business model of expenses versus revenue.
When it becomes time to expand your company, do not overextend yourself financially. Follow the original expenses versus revenue model and ensure expenses remain an appropriate percentage of tracked revenue.
Accounting practices
Accounting practices are key to a successful business. Most new businesses may use some type of internal accounting process via QuickBooks and/or utilization of an office manager. Most businesses will also need to contract outside accounting services to track taxes, payroll, and other expenses. Maximizing tax deductions is important for a new business. Hiring the right accounting firm will ensure you properly track and document monthly profit and loss (P&L) and receive ongoing, proper counsel. Advice can include the best methods to save on taxes and track progress accurately. The ability to present accurate, complete data is important if you are audited by the IRS — and when it eventually becomes time to sell your business.
Clean financials are key to surviving buyer due diligence during an acquisition, and they are an essential element of a buyer defining your business attractive and a worthy investment. If cleaning up your financials requires too much work, this will turn many buyers away.
Personnel
One of the most important — if not the most important — steps business owners must take is hiring personnel. Owners need to find the right personnel and maintain strong employee relationships throughout the journey of running the business.
While one would hope that employees will be as devoted to a business and its success as an owner, achieving this is often unrealistic. Owners have much more to gain and lose. But owners will still want to work to develop employee loyalty to the company, which requires keeping employees engaged, excited to come to work every day, and feeling like they are part of something bigger than themselves.
Achieving these goals starts with transparency. Share the company's ongoing progress — good and bad — with employees. That means not just bring up performance when sales are down.
Make employees a bigger part of the business. Profit sharing is one great way to do so. It better ensures transparency, and when revenue grows, employees directly feel the impact of their work and the company's success beyond receiving a regular paycheck. ESOP companies — those with an employee stock ownership plan — have been extremely successful for this very reason.
Profit sharing also promotes tenure, which is extremely important in keeping quality staff for the long term. The better staff understand the business, the better they will be at performing their work and supporting the business and its growth.
Impacts on a Transaction
The decisions you make concerning debt, accounting, and personnel are just as critical to the start of your company as they are to its end when ownership is transferred. Let's jump to the moment where you're looking to sell your business or find a strategic partner. The first step you will want to take is to highlight your business performance. Owners often get focused on the products or services they provide and the value and benefits these deliver to consumers. However, if your business model and structure are not solid, a buyer is not going to want to acquire your company, or you will not receive what you believe to be a fair offer.
It's important to know that most transactions are debt free. Any debt you have, whether it be tied into your real estate, fleet, renovations, expansion projects, or any other area of operations, will be deducted from the purchase price. Some debt is not necessarily bad, but if it's based on risk and not normal working liabilities, you will be at a financial loss.
If your bookkeeping is not clean, you can expect a difficult transaction process and one that may never reach the finish line. Clean bookkeeping is not about the minimum you can get away with when filing your taxes. It's about convincing a buyer that your business is the perfect acquisition opportunity — one worthy of an investment and one that can be scaled appropriately so the strategic company or private equity investors will generate a return on the investment.
The most crucial test of whether you have achieved clean bookkeeping comes when you go under a letter of intent and the buyer starts the quality of earnings (QofE) report, which is performed by a third party. A QofE is always the immediate telltale on how appropriately you have run your business. For any business that keeps good bookkeeping, with invoices that can be matched with revenue, expenditures at what the market would expect, and no large list of add backs and personal expenses rolled into the company, the QofE should align with your true revenue, often described as adjusted 12-month trailing EBITDA. What is often revealed through a QofE is a reduction in EBITDA, with the third party determining problems with your true revenue. This risk is why it's imperative for business owners to have a proven accounting team handling a company's financials throughout the life of the company.
Finally, personnel is often a company's most valuable commodity. It is not only important to have a well-trained and loyal employee base, but you will want a second, third, and sometimes fourth person in command or capable of assuming command when transitioning ownership. If an owner wants to stay on board and roll over equity post-acquisition, then the number two or three person in charge may not be as important to a buyer. However, if an owner is looking to take a reduced role in the company or completely sell the company and step away, the owner is going to need to prove that the next people in the chain of command know as much about the business as the owner does and will remain just as committed to the business following completion of the transaction.
Find the key leaders in your organization. Teach them the business until you are at a place where you know you can go on vacation for weeks at a time and not need to worry about how the daily operations will run because you have full confidence in the people you have appointed to oversee the company in your absence. If you successfully reach this point, it will be easier to demonstrate to buyers that you have worked for many years to prepare for the transition of oversight and management and are confident that it has reached a level where you can step aside.
The Time to Think About the Value of Your Company Is Always
Many people do not think about the value of their business until they think about selling the company. But the value of your business will be predicated by how well you have run your business throughout its many years of operations.
While it may seem counterintuitive, you should think about the value of your company starting the day you launch your business and then never stop. Best practices, like those highlighted earlier, should be top of mind throughout your entire ownership journey. Otherwise, when you finally decide to pursue a transaction, you will likely find yourself spending a lot of time and money trying to clean up existing processes. Even if you are successful in cleaning these processes, a buyer will likely determine that the consistency you are hoping to show is deceiving. This can cost you offers and the value of offers, but it's simple to avoid if you start on the right track from day one (or as close to this as possible).
Speaking of value, how would an owner know the right time to maximize on that value through a transaction? The best time to sell a business or find a strategic partner is when the business is running on all cylinders. However, when business is performing great, this is usually when an owner thinks the least about selling. It's the time of ownership where running the company is perhaps the most fun, in part because of the tremendous profits. Why would an owner want to share this with anyone else (besides employees)?
To answer this question, look at the scenario from a buyer's perspective. A buyer will see the most value in a business when everything is clicking — margins are great, employees are happy, and there is plenty of current and future business. The worst time to try sell your business is when performance starts going downhill or when you are ready to retire and are unable or unwilling to be part of the next chapter of the company after it has been acquired. While the buyer may not want you to remain involved, many buyers like the option of keeping an owner engaged for at least a short period of time to maintain some continuity and help ensure a smoother transition.
By selling your business at the height of its performance, this will essentially guarantee you the best valuation multiple and will help you get through the acquisition process, which can take many months during which there may be some peaks and valleys in the financials. If you are already maximizing revenue when you decide to launch your sale, you should be able to weather any storms.
To help you get to the finish line that you want for your company, hire an experienced M&A firm familiar with your type of business. As your M&A advisor oversees the creation of your company's confidential information memorandum (CIM) and completion of its financial analysis, they will identify any inconsistencies and irregularities that may have occurred in your business. With this information, your advisor will help you determine what you need to do to address these potential red flags or ensure you explain these issues early in the transaction process. Being upfront demonstrates your commitment to full transparency with prospective buyers and will help you avoid having any "skeletons" in your closet discovered during due diligence.
If you have questions about anything in this column, want to learn whether the time is right for your company to consider sale, are interested in finding out more about the transaction process, or are interested in discussing anything else concerning the future of your company, reach out to our team of expert healthcare M&A advisors at VERTESS. We'd love to hear from you!
J. Blake Peart, RRT, CM&AA
I have had the opportunity of an extensive and diverse career in healthcare for over twenty years. In the past ten years, I have served as CEO for multiple hospitals of Fortune 500 companies and CEO for several large Ambulatory Surgery Centers. In addition, my operations and business development knowledge has allowed me to experience the entire M&A process from start to finish focusing primarily on private equity transactions. My history as both a CEO and clinician provides a unique perspective based on years of experience and empathy when working with business owners seeking M&A advice. My expertise is in Ambulatory Surgery Centers, Physician Practices, and independent hospital businesses. I am here to support healthcare business owners who select the M&A direction as one who has walked in their shoes. I know that every transaction is unique and tailored to a seller’s need in getting the best deal and providing a positive experience throughout the entire process.
We can help you with more information on this and related topics. Contact us today!
Many small healthcare business owners struggle when they achieve a certain size or revenue stream. While these owners may see an opportunity to scale, there are challenges: They still have the "mom-and-pop" ideology (i.e., small company mentality) and their organization is not ready or capable of scaling up.
This can be a frustrating experience for an owner. They feel their company can do so much more business, yet they lack the capital, know-how, technology, and/or experience to transform their healthcare organization from a small business (e.g., $20 million in revenue) business to a much larger business (e.g., $100 million in revenue).
Such a situation is risky for a healthcare business owner. If the owner attempts but struggles to grow the revenue and/or EBITDA of the company, this could greatly devalue the business in just a few years. But that doesn't mean owners should abandon their vision for growth. Rather, they may want to explore a sale or recapitalization.
By pursuing one of these options, owners can accomplish a few worthwhile goals. They can get a nice, first "bite of the apple" for their business. They reduce their financial risk by no longer having so much of their finances in one basket. If they stay involved with the company as either a CEO or board member, they can work with a financial or strategic buyer with the experience and resources to scale and accelerate growth. This collaboration can make achieving growth goals possible and do so in much less time than if the owner attempted to achieve such growth on their own. If growth is successful, the owner and existing (or new) management team would be able to get a second — and likely much bigger — bite of the apple and then cash out with the right rollover or stock incentives.
7 Steps to Achieving an Ideal Healthcare Transaction
If proceeding with a sale or recapitalization sounds like a good plan for your business, follow these seven steps to help find the right buyer and partner who can help you take your healthcare company to a much higher level.
1. Set your healthcare transaction goals
Take time to determine the goals for the transaction you're considering. Make goals lofty but achievable. To accomplish the latter, put together a supporting team that will provide the backing and expertise you need to develop an optimal plan for moving forward. This team should be comprised of key internal executive leaders, such as the chief operations officer and chief financial officer, and key external professionals, such as a healthcare M&A advisor (like one from VERTESS), attorney, and accountant.
2. Outline your ideal situation as the owner/leader
How much of your company are you willing to sell to acquire the resources needed to achieve your growth plan? In what capacity do you want to remain with the organization following a transaction? Answering these and related questions concerning what you envision as your company's post-transaction situation and your level of continued involvement is important to ensuring an optimal outcome when your company goes to market.
3. Assess your organization's personnel
Start with your immediate leadership team and cascade down. Ask yourself questions like: Do they have the drive, capability, and experience to take on this journey? Can you envision them as part of a company you hope will be a few or even several times larger in just a few years? If you cannot answer these questions with a confident "yes," you may need to consider changes to your personnel — which brings us to the next step…
4. "Topgrade" your leadership team
Before you proceed with bringing on a financial partner, you will want to consider topgrading your leadership team. Topgrade means two things: It can be a nice way of saying upgrade your team by replacing existing leaders with better qualified leaders, and it can mean improving your current team though training.
Why is topgrading important when contemplating a sale or recapitalization? This is not the time to hope you have the right people or look past shortcomings that make these individuals less effective in their roles. Be prepared to replace leaders or find them new roles that will be better fits in support of the overall growth plan, or at least consider whether training can strengthen your existing leadership team.
If you have a solid leadership team, it's still worth taking the time to identify knowledge gaps and then invest in training and executive coaching. A financial buyer will see much higher value in an organization that comes to the table with an all-star leadership team already in place and ready to put in the work that can help achieve growth goals.
5. Test the transaction waters
Even when owners are not necessarily looking to sell, they should always be putting feelers out to gauge buyer interest in their company. This way, they won't miss key opportunities to bring in a partner, sell, or recapitalize.
If you're serious about testing the waters, this is a great time to speak to a healthcare M&A advisor and receive a valuation on your organization. A good advisor will coach you on whether it is the right time to sell and provide advice on what you should do to better prepare for a successful sale. An advisor can share competitive insights (e.g., previous competitive sales and multiples) and paint a picture of what buyers are currently looking for — and, just as important, not looking for.
If you decide to sell, an advisor can be invaluable in creating that competitive environment that attracts buyers and drives up your sale price. In addition, an advisor will aid in all the transaction negotiations and help ensure the appropriate stock options and rollover equity are included in the deal. Learn more reasons why you should work with a healthcare M&A advisor in this column by fellow VERTESS team member, Bradley Smith.
6. Identify your ideal partner
If you feel it's time to grab that first bite of the apple and your organization is ready to scale with the right plan and the right team, think long and hard about what the ideal buyer looks like. Is it a financial partner? Do you want a strategic buyer who will make your company part of a larger competitor's organization? VERTESS's Alan Hymowitz recently discussed the three predominant healthcare buyer types and the challenges associated with completing transactions with these buyers in this column.
In most scenarios where owners want to stay on with their company and cash out even bigger in a few years, the financial buyer tends to be the clearer path forward. This is not to say a strategic partnership cannot work. In some cases, it's the right decision. However, when you are looking to drive the organization beyond your current capabilities, someone who is going to invest quickly into the company and target its key needs for growth tends to be the right partner.
This is also an area where a healthcare M&A advisor can prove very helpful. Most advisors, especially ones specializing in your line of business, have extensive resources and "rolodexes" of potential buyers and can quickly help you cast the right, wide net to initiate discussions with high-quality, potential buyers.
7. Fish or cut bait
After going through the processes discussed thus far, which should help you gain a better understanding of your company, its leadership, and your potential paths forward for sale or other type of transaction, it's time to make a decision. As the owner, you will want to do what is right for you and the future of your company, including your team and its customers. If you decide to proceed with pursuing a transaction, the work you have put in should help ensure a more successful outcome. If you feel it's best to wait a year so you can better get your house in order, you will be in an even stronger position when the time is right to proceed.
Understanding Your Healthcare Transaction Options
Selling your "baby" can be emotional but exciting as well. Following the steps above and better understanding your healthcare transaction options will put you in a much stronger position regardless of whether and when you sell.
If you have questions about pursuing a sale or recapitalization, reach out to our team of expert healthcare M&A advisors at VERTESS. We'd love to learn about your business and talk about how we can work together to achieve the best path forward for you and your company.
Gene Quigley
For over 20 years I have served as a commercial growth executive in several PE-backed and public healthcare companies such as Schering-Plough, Bayer, CCS Medical, Byram Healthcare, Numotion, and most recently as the Chief Revenue Officer at Home Care Delivered. As an operator, I have dedicated my career to driving value creation through exponential revenue and profit growth, while also building cultures that empower people to thrive in competitive environments. My passion for creating deals has helped many companies’ platform and scale with highly successful Mergers and Acquisitions.
At VERTESS, I am a Managing Director with extensive expertise in HME/DME, Diagnostics, and Medical Devices within the US and international marketplace, where I bring hands on experience and knowledge for the business owners I am privileged to represent.
We can help you with more information on this and related topics. Contact us today!
Considering the substantial global and national turmoil of the past several years, it should come as no surprise that the current mergers and acquisitions (M&A) landscape is complex, and navigating it is challenging. These are a few of the main reasons why healthcare business owners and buyers frequently reach out to the VERTESS team: They are looking for expert help with executing successful transactions that meet personal and professional goals in this dynamic landscape.
A significant role we play as healthcare M&A advisors is to answer questions from our clients and prospective clients about the issues affecting sellers, buyers, and transactions more broadly. Below are 10 of the questions we are being asked and answers intended to capture the current sentiments and strategic considerations in the M&A market.
Q1: M&A deals declined in the first half of 2024. What was the cause?
A: Several factors contributed to a fairly significant downturn in deal activity. Among them: high interest rates, lower current valuations than the same period last year, and political uncertainty.
Q2: Is M&A activity likely to increase in the near future?
A: Yes, there is a strong belief that M&A activity will rebound, and it will be driven by pent-up demand from both buyers and sellers as uncertainties that have been weighing on the market begin to resolve.
Q3: How are private equity firms responding to the current M&A landscape?
A: Many private equity firms are feeling increased pressure to sell, particularly those with portfolios comprised of numerous aging companies. Such a scenario is prompting an elevated focus on realizing returns to maintain investor confidence.
Q4: Are there signs of increased activity among sellers?
A: We have seen a noteworthy rise in sale preparations, which include the development of full-potential business plans and vendor due diligence engagements.
Q5: I heard that the need for M&A is greater now than in previous periods. Why is this the case?
A: We canpoint to the cumulative pressures of low-growth economic conditions combined with the need for businesses to adapt and innovate as reasons that are driving an elevated interest in strategic transactions.
Q6: Artificial intelligence (AI) continues to be a big topic of discussion within and outside of healthcare. How could AI influence M&A transactions?
A: Generative AI, which is the use of algorithms (e.g., ChatGPT) to create content, has the potential to disrupt various sectors, including healthcare. Disruption creates challenges and opportunities for companies. This then influences M&A strategies — potentially significantly, depending upon the extent and short- and long-term impact of the disruption.
Q7: When is the optimal time to sell my business?
A: The optimal time to sell is when you, as the owner, feel personally ready to move on to your next chapter, whether that's retirement, starting a new venture, or spending more time with family.
Q8: How should I take market conditions into consideration when deciding whether to sell my company?
A: While market conditions usually influence the valuation and sales price of a company, they should not be the primary factor in your decision to sell. The timing should be based on your readiness rather than trying to time the market. My colleague, Bradley Smith, tackled the topic of timing the market for an exit in this column.
Q9: How do rising interest rates impact the sale of my business?
A: Rising interest rates can affect the overall financing landscape, making it more expensive for buyers to obtain the loans they typically need to make acquisitions. However, it's important to understand that buyers adapt to these changes. While the cost of debt has increased, many buyers are shifting toward equity financing and still actively seeking acquisitions. Interest rates may influence buyer behavior, but they won't necessarily deter potential buyers from pursuing your business.
Q10: Is feeling burned out with my business a good reason to consider selling?
A: It's a very good reason to consider selling. When enthusiasm for owning and operating a company declines, it will likely negatively affect your business and its performance. This may not only hurt your company's valuation and thus its sales price, but it may also turn away buyers who see a company moving in the wrong direction.
Ready to Answer Your Healthcare M&A Questions
These questions and their responses help paint a picture of the current M&A market and key considerations for sellers and buyers. They also emphasize the importance of remaining adaptable and well-informed as you pursue a sale of your healthcare company or acquisitions of businesses. If you are looking for expert assist with transactions, including getting questions like those above answered, reach out. The VERTESS team of Managing Directors, who are focused on specific healthcare verticals, would welcome the opportunity to speak with you about your situation and what we can do to help ensure you achieve the best transaction outcome possible.
Anna Elliott CM&AA
With over 15 years of experience in healthcare technology, post-acute care, hospice, and urgent care, I am a highly experienced healthcare executive. I have successfully supported numerous private equity roll-ups and exits in the home healthcare sector. My extensive knowledge of the healthcare industry and my leadership in the M&A community, as a certified M&A Advisor (CM&AA) and member of the Executive Committee of the Chapter of the Association for Mergers & Acquisitions Advisors (AM&AA), distinguish me from others in the field.
Throughout my career, I have specialized in healthcare and have excelled in attracting healthcare technology firms and industries that are growing through Mergers + Acquisitions. I have a strong ability to target specific needs and opportunities in the business supply and demand process, resulting in over $150 million in value delivered to organizations.
As a co-founder of M&A Finders, a boutique Merger and Acquisition advisory firm in Pittsburgh, I have been able to pursue my passion for advocating on behalf of buyers and sellers in achieving their M&A goals. I am excited to bring my skills and network to VERTESS, where I have access to the necessary resources to further expand my impact in the healthcare industry.
We can help you with more information on this and related topics. Contact us today!
Last year, I wrote a column on "Choosing a Buyer: Private Equity vs. Search Fund vs. Strategic." As the title would suggest, this well-received piece discussed the three predominant buyer types — private equity group (PEG), search fund, and strategic buyer — healthcare business owners are likely to encounter when they decide it's time to sell their company and what sellers should know about them. I have had the good fortune of closing deals with each of these buyer types over the past few months, so I thought it would be worthwhile to do a follow-up piece to this column — one that discusses the challenges associated with getting transactions involving these buyers to and across the finish line.
Each buyer type has its own challenges, and understanding how to navigate them most effectively and efficiently is one of the most important roles I play as a healthcare M&A advisor. As I collaborate with seller clients to overcome these roadblocks and any curveballs, I am focused on achieving not only the best valuation for clients but also the deal structure that would most benefit them. Understanding how buyer types differ in how they structure offers and prefer to proceed through the due diligence phases is essential to achieving a seller's goals and ultimately a successful transaction and transition.
Let's take a closer look at each of these three buyer types and key points to know about their acquisition approach.
Private Equity
PEGs are also referred to as financial buyers. As this name suggests, their approach is largely based on a healthcare company's financials. Broader due diligence focuses primarily on intense auditing of documents like profit and loss (P&L) statements, balance sheets, and bank statements for the trailing 12 months up until 30 days prior to close.
Legal due diligence will focus on areas like contracts, state boards, and regulatory issues. Sellers should expect weekly due diligence calls with a PEG's legal, tax, regulatory, management, accreditation, licensing, and human resources representatives, and must be prepared to answer their questions and produce any documents requested. At closing, other legal steps must be completed, such as a reorganization.
The deal structure will likely include shared risk, rollover equity, non-competes, earnouts, and employment agreements. Given this continued involvement from ownership, it is worth noting that PEGs used to largely approach acquisitions with a 5-7-year turnaround plan. That plan can now last longer, even surpassing 10 years.
A PEG is more likely to desire keeping the existing management team in place, unless a necessary change is identified during due diligence.
Search Fund
Also referred to as unfunded sponsors, search funds take a "buy-and operate" approach to acquisitions. This translates to current owners usually only remaining for a short consulting period post close.
Search funds come to transactions with previous and fairly extensive knowledge about the company's sector and what's required for success within it. These buyers focus less on financials and the likes of P&L and balance sheets. They look for profitable companies with strong potential growth and return. These are important given that search funds usually have no growth capital, which places greater emphasis on current and potential legacy growth.
Search funds tend to require strict non-competes and expect that current, essential staff will remain with the company while also usually turning over upper management. Scrutiny and audits of an acquisition focuses on regulatory issues, changes of ownership (CHOWs), and any legal issues past and present.
Following the signing of a letter of intent, search funds work to secure funding for the acquisition. The capitalization table (i.e., cap table), which shows a company's ownership structure, will change daily or weekly depending on what's discovered in due diligence up until the day a transaction closes. Each search fund investor has its own requirements.
Finally, search funds tend to hold onto assets longer than PEGs.
Strategic Buyers
These are typically what are referred to as "non-financial" (to contrast PEGs) or "buy-and-build" buyers. They tend to already be well-established in the industry in which they are pursuing an acquisition. Thus, they come to the transaction table with vast knowledge but not necessarily the personnel, so they tend to need the talent and resources that come with the acquisition.
As the descriptor of non-financial buyer suggests, strategics are less focused on financials of the company. Rather, the acquisition is motivated by one or more of needing the acquisition's location, talent, contracts, or customers, or a desire to eliminate a competitor. Strategic buyers also view acquisitions as a way to pursue and further achieve economies of scale.
Strategic buyers tends to have a shorter due diligence period than the other buyer types.
Private Equity, Search Fund, and Strategic: Completing Your Sale
If you're operating a good company, finding interested buyers is usually easy. What comes next is much more difficult, which points to the value of working with a healthcare M&A advisor, like those at VERTESS. Determining a desired exit strategy and optimal buyer type, bringing a company to market, attracting the right buyers, properly vetting buyers, selecting a buyer, and finally navigating the subsequent transaction processes all include challenges that can derail an optimal and successful outcome.
The VERTESS team is comprised of advisors with extensive experience operating healthcare companies and working with all buyer and seller types. We support clients through the entire M&A process and beyond, which includes helping clients achieve a smooth post-transaction transition.
Reach out to learn more about how VERTESS is helping business owners like you achieve successful sales.
Alan Hymowitz, CM&AA
During the past decade I have facilitated numerous, diverse M+A transactions in the pharmacy marketplace across the country, as well as providing strategic consultation to national pharmacies and similar organizations. Prior to becoming an M+A advisor, I was a “hands on” owner and manager in the pharmacy and home infusion healthcare marketplace for over 15 years, and successfully sold my pharmacy to a national company after growing and diversifying our income streams in a very competitive market. My specialties in the pharmacy and home infusion marketplace include long term care, retail pharmacy, specialty pharmacy, and home healthcare, and I have attained the URAC Accreditation and Specialty Pharmacy Consultant designations, in addition to other recognition. My educational background includes a Bachelor of Arts from Rutgers University and a Master of Arts from the John Jay College of Criminal Justice.
We can help you with more information on this and related topics. Contact us today!
When we are approached by healthcare business owners contemplating a sale and researching their options for assistance, a common question we're asked is: "Why should I hire a specialized healthcare mergers and acquisitions (M&A) advisor for my company?"
The simple answer is that an M&A advisor who specializes in healthcare is more likely to help owners achieve successful transactions, with "success" including a fair sales price and the passing along of the business to a company that will continue to treat staff and customers well.
9 Reasons to Work With a Healthcare M&A Advisor
For a more complete answer to why healthcare business owners should work with healthcare M&A advisors, here are nine reasons.
1. Leveraging extensive experience
A healthcare M&A advisor generally has experience in representing companies in various healthcare verticals and broad knowledge of the healthcare industry. This will help a business owner prepare for the sales process with insights about the owner's unique market. When the advisor is part of a larger healthcare M&A advisory firm, like VERTESS, they are further supported by other advisors and experts who can share additional insights.
2. Improving the selling process
Selling a healthcare business is a complex process filled with multiple tasks that can be overwhelming and often underestimated by owners given that most have not experienced the sale of a company before. Simultaneously, a healthcare business owner is typically busy running their company, which limits the amount of time and energy that can be allocated to the sales process.
Bringing aboard a healthcare M&A advisor can smooth the transaction process while better ensuring a high return on investment. There are always obstacles and bumpy roads in the process of selling a healthcare company, but a savvy advisor helps sellers navigate them and avoid the many reasons transactions can fail to secure a successful agreement with a buyer or investor.
3. Maximizing healthcare business value
A healthcare M&A advisor will be able to market the healthcare company to more targeted buyers, and this will often lead to more high-quality partner options for the seller. More value could mean creative strategic partnerships, maintaining the owner's legacy, retaining a core management team, and higher price and/or better terms in the sales agreement.
4. Integrating healthcare knowledge into marketing
Effective healthcare M&A advisors integrate their knowledge of a specific healthcare vertical and broader healthcare industry knowledge into their marketing approach. Utilizing established industry relationships and networks, a healthcare M&A advisor can connect sellers with buyers and investors that have the highest appreciation for the seller's market segment and potential value of their business.
5. Showcasing value
Through their many years working in the healthcare industry, a veteran M&A advisor has learned what financial analysis and presentation will resonate most with potential buyers. As a result, they will make sure that marketing materials feature a professional financial analysis that contributes to the highest valuation.
6. Painting a complete picture
Skilled healthcare M&A advisors generate a confidential information memorandum (CIM) — otherwise known as "the marketing book" — to tell a healthcare company's story to prospective buyers. The CIM includes information that speaks to significant areas of interest for buyers, such as successes, differentiators, growth opportunities, local market dynamics, and larger healthcare market trends. The completeness of the CIM is usually correlated to the healthcare M&A advisor's understanding and experience and their ability to tell the compelling story of the healthcare business and its owner(s).
7. Managing the healthcare transactions process
Competent healthcare M&A advisors will manage a sales process in which various buyers are screened by level of interest, commitment, and financial qualification to complete a fair transaction. Within their networks, healthcare M&A advisors often access unique market intelligence to assist them in their representation and execution.
8. Closing the deal
Healthcare M&A advisors often know about unique, market-related nuances that will help with the final negotiation of deal terms. This understanding can help guide the business owner through escrows, non-compete or interim management agreements, and other critical decisions on the way to a successful sale.
9. Delivering value
The ninth and final reason to work with a healthcare M&A advisor — delivering value — is a composite of the above. In a time of much turbulence and opportunity in today's healthcare industry, an accomplished healthcare M&A advisor often brings value that far exceeds their fee while helping sellers reach the goals that were established prior to starting the sales journey.
VERTESS: A Top Healthcare M&A Advisory Firm
If you're contemplating a sale of your healthcare business and are looking for a partner that can help you achieve your sales goals, reach out to VERTESS. Our team of Managing Directors, who specialize in specific healthcare verticals, has the extensive healthcare transaction experience that leads to more successful sales. This track record recently helped us earn the distinction of being named the #1 lower middle market investment bank for the first quarter of 2024 by Axial, and I was proud to be recognized as the advisor for one of Axial's top 8 deals in 2023.
To learn what VERTESS advisory services can do for you and your healthcare business, reach out to us today!
Bradley Smith ATP, CM&AA
For over 20 years I have held a number of significant executive positions including founding Lone Star Scooters, which offered medical equipment and franchise opportunities across the country, Lone Star Bio Medical, a diversified DME, pharmacy, health IT and home health care company, and BMS Consulting, where I have provided strategic analysis and M+A intermediary services to executives in the healthcare industry. In addition, I am a regular columnist for HomeCare magazine and HME News, where I focus on healthcare marketplace trends and innovative business strategies for the principals of healthcare companies.
At VERTESS, I am a Managing Director and Partner with considerable expertise in Private Equity Recapitalizations, HME/DME, Home Health Care, Hospice, Medical Devices, Health IT/Digital Health, Lab Services and related healthcare verticals in the US and internationally.
We can help you with more information on this and related topics. Contact us today!
Private equity often carries a negative connotation in the healthcare industry. However, if you are considering selling your business, it's crucial to understand the impact private equity has on the overall deal market and the sale of your company. At VERTESS, we focus exclusively on transactions in various healthcare sectors. By tracking the activity of private equity groups, or PEGs, we gain insights into the current market dynamics, allowing us to better advise our clients on what to expect when selling their businesses.
In this column, we will briefly define private equity, then dive into the influence of it on the sale of healthcare businesses, current trends in healthcare private equity activity, and what business owners should consider when planning to sell their companies.
What Is Private Equity? Private equity is an alternative investment strategy that allows institutional and accredited investors to invest in private markets. These groups invest in private businesses to increase their value over a holding period — one typically lasting 5 to 7 years. PEGs have an ultimate goal of selling the businesses for a profit.
One strategy for increasing the value of these portfolio companies is through mergers and acquisitions (M+A), where companies consolidate multiple businesses under a single entity. By acquiring regional and national competitors or businesses with synergistic lines, these portfolio companies can add revenue and earnings, thereby increasing their value when sold.
What Influence Does Private Equity Have on Selling Your Healthcare Business?
Why is private equity important for business owners? When you decide to sell your healthcare business, you will likely receive offers from multiple entities, potentially including private equity-backed portfolio companies and private equity funds. Tracking their activity in the market can help you understand what to expect when selling your business. While private equity groups are not the only buyers in the market, knowing how they acquire and invest in companies provides valuable insights into the market as a whole.
Where Things Stand: A Closer Look at Private Equity Activity in 2024
In 2023, M+A activity was sluggish across most sectors and especially in healthcare. High interest rates lowered business valuations, creating a gap between owners' expectations and buyers' valuations.
In the first half of 2024, private equity showed signs of recovery in the global M+A market. After a slow start, private equity deal activity increased, stabilizing its market share and alleviating concerns about private equity's role in the anticipated M+A rebound. Exit activity, crucial for healthcare industry growth, improved significantly after a long period of stagnation, elevating fundraising and capital availability for future investments.
Private equity fundraising exceeded expectations, showcasing the healthcare industry's resilience and continued investor confidence, despite an anticipated slowdown in the latter half of the year. Middle-market funds performed well, in contrast to the more challenging environment for megafunds.
As the stock market includes more smaller cap stocks, private equity valuations and exit opportunities are expected to improve further. The healthcare industry's adaptability and forward momentum amid challenging conditions highlight its potential for continued growth and success.
Looking at the more recent quarter of 2024 (Q2), healthcare private equity activity showed promise despite a lighter quarter overall. The healthcare sector accounted for a substantial portion of deal activity, with numerous transactions reflecting strong down-market deal flow. Notable deals included Cotiviti's recapitalization by KKR and Veritas and Thomas H. Lee Partners' acquisition of Agiliti, indicating ongoing interest in healthcare investments. Healthcare services dominated private equity deals, while pharma services also attracted significant interest, with multiple platform deals closing.
The demand for weight-loss drugs sparked interest in peptide manufacturing, aligning well with private equity's focus on consistent business models. Despite high valuations and economic uncertainties, the healthcare sector remains robust for private equity investment, driven by strategic acquisitions and divestments.
In conclusion, the first half of 2024 has shown encouraging signs of recovery and growth for private equity in both the general M+A market and the healthcare sector. Improved deal activity, strong fundraising, and strategic investments indicate a resilient and adaptable industry poised for continued success. The healthcare sector, in particular, remains a key area of interest for investment groups, with ongoing investment opportunities driven by market demand and strategic divestments.
Current Private Equity Activity Is Good News for Healthcare Business Owners
Understanding private equity activity is crucial for healthcare business owners considering selling their companies. The current market conditions in the first half of 2024 have shown recovery and growth in private equity, particularly in the healthcare sector. Improved deal activity, strong fundraising, and strategic investments indicate a resilient and adaptable industry poised for continued success.
As deal activity increases for private equity firms, this signals that buyers will be actively seeking investments in the healthcare market. Private equity firms aim to increase the value of their investments through market consolidation and eventually exit from these investments in the coming years. This positive trend in deal activity among private equity firms suggests favorable conditions ahead for the sale of healthcare businesses, regardless of their size. For business owners, staying informed about private equity trends and market dynamics can provide valuable insights and better prepare them for potential sales, ensuring they achieve the best possible outcomes in a competitive market.
At VERTESS, we specialize in healthcare M+A transactions by working with business owners to capitalize on these market opportunities and negotiate the best deal possible for their business. We have built a network of relationships with buyers in our key verticals to ensure we bring the right pool of buyers to any client. This will help not only achieve the best outcome in purchase price but also the best post-transaction fit for their business, employees, and clients. If you would like to learn more about the state of healthcare M+A and investing or how VERTESS is particularly well-suited to help sell your healthcare business, please reach out to us.
Dave Turgeon, CM&AA
I’ve been fortunate to work for several exceptional companies. I’ve contributed in roles that include CEO, COO, and managing growth. I’ve been part of private equity-backed companies focused on building value and growing, which has allowed me to acquire of hundreds of companies and invest billions of dollars. I began focusing on behavioral health about twelve years ago based on a family member. Many people know me from my experience running the M&A efforts at Civitas Solutions leading up to their successful IPO in 2014. I feel very fortunate to be in a position now to help business owners who built companies whose mission it was to care for others. I’m in the unique position of helping them get the very best deal possible
As a Director at VERTESS, I bring extensive experience in sales, consulting, and project management from early-stage startups. With an MBA from Babson College, I have a strong foundation in business strategy, operations, and financial analysis. My personal connection to behavioral healthcare through a family member motivates me to help business owners get the best deal possible while ensuring high-quality care for their clients. Throughout the M&A process, I provide comprehensive support at every step. I have a proven track record in negotiations and client management after working with companies in various industries. I’m excited to join VERTESS and make a meaningful impact on the lives of the owners I work with.
We can help you with more information on this and related topics. Contact us today!
Volume 11, Issue 11, June 18th, 2024
By: Bradley Smith
At least seven out of 10. That's at the low end of how many mergers and acquisitions (M+As) are likely to fail. The high end? Nine out of 10.
These are not misprints. They are conclusions of research, as referenced by Harvard Business Review and other publications. They tell us that 30% of M+As at most succeed, while only 10% are essentially assured to succeed.
These M+A failure and success figures were determined via examination of a large pool of deals in every business sector. Common reasons frequently cited for such a high failure rate include an uninvolved seller, culture shock at the time of the integration, and poor communications from the beginning to the end of the M+A process.
With the odds seemingly stacked against healthcare business owners, why would you consider selling your company, especially if you expect to be invested (financially and/or personally) in the future of the business after a transaction?
At VERTESS, we have found that the M+A process can be navigated and lead to a higher success rate when have the right information and team to work with. It also helps to understand what can go wrong and how to avoid making these mistakes. I personally have a closing rate of about 82%.
Here are 10 of the factors that can lead to failed mergers and what is necessary to overcome the shortcomings.
1. Not knowing the motivations of buyers and sellers
There are essentially two kinds of sellers: one that looks for the most money for their business and one that needs to find the perfect buyer for the individuals, families, staff, and community related to the business. Buyers, on the other hand, come in all shapes and sizes, from strategic buyers that are looking for growth to financial buyers (private equity) looking to build and flip — and many shades in between.
If a transaction has any hope of being a success, it is important to determine the motivations for both parties. At VERTESS, we always discuss what is most important to sellers well before bringing their business to market. We also carefully screen all buyers to understand their intention and assess if there is a good fit.
These steps help with winnowing down what could be a lengthy list of prospective buyers to those that align well — at least on paper — with a seller. If there isn't good alignment, there is likely no reason to continue conversations with a prospective buyer.
2. Unrealistic expectations
It's not unusual for sellers to believe they should receive a certain amount of money — usually a particularly high amount — for their business because that's what they believed the company was worth. Sellers often estimate what their company is worth after hearing about transactions for other companies in their market, reading articles and columns that discuss multiples and prices paid, or being approached by a prospective buyer that casually threw out some figures.
The numbers sellers envision are often unreasonable. That doesn't mean they don't have a good company that should do well on the market. Rather, it means that most people naturally believe that something they value is valuable — and often more valuable than the market would believe. A financial analysis and valuation can reveal figures that are objective and in line with similar transactions. Most buyers are unwilling to cross certain thresholds, regardless of how amazing a business may be (or seem to be to a seller).
Ultimately, a company is worth what someone is willing to pay for it. The only way to maximize a valuation of a company is to run a process that brings in all the buyers and has them make offers simultaneously. Anything less will likely result in selling your company for less.
A seasoned healthcare M+A professional can help prepare a seller ahead of time for the selling experience, including what offers to anticipate. Both parties should reach an understanding of the expectations of the sale before going to market.
3. Hidden debt and financial instability
Buyers understand sellers sell for many reasons, including the fear of losing the company because of debt or money stresses. However, no one wants to be halfway through a transaction due diligence process only to learn about the numbers trailing downward or worse: the posting of foreclosure notices. This tension for a seller will often lead to poor decisions. Any buyer will be aggressive and take advantage of the situation.
Be forthcoming with your healthcare M+A advisor. Paint the complete, honest picture of your business — its successes and especially the struggles and how you overcame them. Transparency is essential. With a clear understanding of your business, the advisor may have some immediate suggestions to stabilize the situation until the right buyer is found or can help fast-track the process to maximize value.
4. Inaccurate financials
The first step of our process here at VERTESS is to present to sellers a financial picture of their business the way that buyers will assess it. We help formalize even the most difficult financial (e.g., QuickBooks) records. We also complete a proforma that projects future earnings and opportunities.
Despite our best efforts, there are ways these processes can lead to the presenting of incorrect information. How? The numbers we use are provided by the sellers. If the data shared with us is incorrect, we will then be working with incorrect data, and we may not be able to identify all the errors. In addition, most buyers will convert the financials to an accrual basis and expect them to be compliant with generally accepted accounting principles (GAAP). This exercise will compromise a weak set of books and lead to inaccuracies.
We have seen sellers overinflate growth for future years, underestimate the cost of their services, or book revenue incorrectly. We can often secure a great offer with these numbers. However, once under a letter of intent (LOI), the buyer will conduct a quality of earnings (QofE) review. That's often when we learn that the numbers provided to us are not accurate. The result? The buyer either adjusts the purchase price accordingly or pulls the offer.
5. Quality of earnings
Speaking of quality of earnings, in today's healthcare M+A environment, buyers are highly reliant on the QofE report to the point of weaponizing the report to gain leverage on a transaction and ultimately reduce the purchase price. Given these unusual times, I highly recommend completing a seller's QofE prior to going to market.
In my column, "'The Deal Killer': What to Know About Quality of Earnings," I explain that the benefits for a seller that takes this initiative and makes this investment are significant. I further state that it has become a "gamechanger" for sellers. Why?
The buyer will still conduct a seller's QofE at the buyer's expense. However, this QofE will go by quicker and with less disruptions to the transaction process if the seller has completed its own QofE. A seller that completes the QofE can use the insight into its company's financial shortcomings to address any accounting issues identified that could be leveraged against the seller during transaction negotiations. A seller's M+A advisor should be able to help their client avoid most of the challenges and frustrations that can come from a QofE.
6. Change of ownership
It's very easy to change the name of a company owner. For one reason or another, you might decide to put your spouse or child as the owner. No big deal, right? Depends on your plans to sell the company and the regulatory standards of your payers.
In the eyes of many licensing agencies, such as the Centers for Medicare & Medicaid Services (CMS), any "change of ownership" (CHOW) must be reported to these agencies. That's straightforward.
What you may not know is that CMS, as an example, has a rule preventing organizations from undergoing a CHOW more than once every 36 months. If you reported a CHOW 24 months ago, the sale of your company to a new owner would have to wait 12 months.
States often have their own set of regulations around the sale of an organization that could greatly affect how a healthcare transaction should be structured. In addition, every payor will have its own set of rules around the change of ownership, with most payors having preclosing notifications.
To better ensure a smooth sale, know what guidelines exist before you start the process. Your M+A advisor should help you understand the rules that will affect your business and its potential sale.
7. Inflated "add-backs"
During the financial valuation process, we at VERTESS calculate a seller's earnings before interest, taxes, depreciation, and amortization (EBITDA) as well as the adjusted EBITDA. Adjusted EBITDA removes expenses the seller has incurred as a business owner that the next owner will not likely incur, which are referred to as "add-backs." These might be a car payment, executive development coach, or membership at a business club. Adjusted EBITDA is often the basis for valuing the company.
Most buyers will agree with such standard add-backs, but if a seller adds items of a questionable nature that the buyer does not agree with, the purchase price can experience a substantial adjustment. It's important to understand each add-back that you list and be ready and able to support why it is an expense the future owner will not need to incur.
A seller might receive an initial offer that appears generous, but once add-backs are discredited, the price may not be what was anticipated.
8. Lack of communication
The M+A process is lengthy and can take many months — sometimes even a year or more. Effective communication is critical throughout a healthcare transaction, with the communication starting with how your company is represented to prospective buyers during introductions. It becomes more intense when negotiating an LOI and finally during closing. Breakdowns in communication can jeopardize a deal at any stage of a transaction.
Maintaining consistent, transparent communication throughout the due diligence process supports a smoother experience. Expectations should be made clear between the buyer and seller, better ensuring that their post-transaction priorities are aligned. This can help avoid future culture and transition shocks.
Enlisting the expertise of a knowledgeable healthcare M+A advisor to communicate the good, bad, and ugly between buyer and seller can help avoid or at least greatly reduce discomfort and allow each party to work comfortably together following the closing. It is important to know that one person is overseeing each step of the process, from introduction to integration.
9. Poor representation
We have worked with clients that have used their trusted lawyer/friend to represent them during the selling stage. What many of them found was doing so resulted in making the process painfully confusing, time-consuming, and frustrating, often causing the deal to fail.
Let's face it: Buyers are typically experienced and have gone through the M+A process multiple times. Sellers, most likely, have not, which is why they need a lawyer with experience in their area. The details and language involved in a healthcare M+A transaction are often complex. There is often common language and terms that an experienced healthcare M+A lawyer will know to look for. This helps ensure a seller's best interests are represented in the deal.
A knowledgeable lawyer will also not waste time on other common protections for the buyer. If your lawyer is arguing over language or points that are typically standard in a deal, not only are you wasting your time and money, but you may be frustrating and insulting the buyer.
Have someone in your corner who knows the legal pitfalls and vulnerabilities you will encounter during the final stages of a deal. This will help you receive the most protection while making sure you understand the nuances of the legal jargon that will affect the sale of your business.
10. All eggs in one basket
When it comes time to sell your company, you may be tempted to jump at the first prospective buyer that approaches you with a reasonable offer and good fit from a culture perspective. After all, doing so will seemingly reduce the length and stress of the selling process.
This approach can work well, but we have also seen it go south very quickly. The reason: If the buyer knows or believes it's in the driver's seat, it may pay what it thinks is a price likely to get a seller to bite and not necessarily what is fair and appropriate.
Without competition, a seller loses critical leverage and may be pressured into compromises. For example, we worked with a client approached by a buyer directly. This buyer offered an amazing multiple for his company. It was the first offer he received. On paper, the offer looked like a great deal. Unfortunately, once the LOI was signed, the buyer quickly pulled apart the financials and discounted so many items that the multiple was no longer desirable.
Fortunately, the seller was knowledgeable about what he deserved to receive for his company and pulled out of the deal. Unfortunately, he had not engaged in discussions with other prospective buyers, so he lacked alternative avenues to explore. He then needed to start over with us. Had we started the process together, we could have quickly pivoted to other interested buyers when the initial deal fell through.
Making the Best of the Challenging Healthcare Merger Process
The M+A statistics shared at the beginning of this column were not intended to discourage you from selling your company. Rather, these stats help paint a realistic picture of the marketplace. The good news is that with the proper preparation, open communication, knowledge of the transaction process, and support by a team of competent, skilled healthcare M+A advisors, you will greatly increase the likelihood of being in the minority of companies that achieve a successful merger.
To learn how the expert VERTESS healthcare M+A advisors can help you get to the transaction finish line, contact us today!
Bradley Smith ATP, CM&AA
For over 20 years I have held a number of significant executive positions including founding Lone Star Scooters, which offered medical equipment and franchise opportunities across the country, Lone Star Bio Medical, a diversified DME, pharmacy, health IT and home health care company, and BMS Consulting, where I have provided strategic analysis and M+A intermediary services to executives in the healthcare industry. In addition, I am a regular columnist for HomeCare magazine and HME News, where I focus on healthcare marketplace trends and innovative business strategies for the principals of healthcare companies.
At VERTESS, I am a Managing Director and Partner with considerable expertise in Private Equity Recapitalizations, HME/DME, Home Health Care, Hospice, Medical Devices, Health IT/Digital Health, Lab Services and related healthcare verticals in the US and internationally.
We can help you with more information on this and related topics. Contact us today!
Owners of healthcare companies are accustomed to creating financial value for their businesses by focusing on the traditional areas of scope of services, client/patient capacity, and revenue streams via reimbursement yield and patient volume.
While revenue growth and operational efficiency are key value drivers for a healthcare company, neither addresses a critical value factor known as company-specific risk (CSR). CSR, also referred to as unsystematic risk, can be understood as risk unique to a company or industry. Differences in CSR are one of the most significant reasons some healthcare firms get top dollar when sold, while others receive a fraction of their potential sale price.
Let's look at five ways healthcare business owners can increase their financial value by decreasing their CSR.
1. Create a fully developed, written business plan
Few small to medium-sized healthcare businesses create a business plan once they are no longer early-stage companies. Instead, they tend to rely on an informal, ad-hoc approach to planning that relies extensively, if not exclusively, on the activities of the business owner(s).
Taking the time to develop a written business plan at various stages of a company's history provides owners and employees the ability to discuss and create a roadmap that supports the owners' business strategy. A detailed business plan also decreases CSR by addressing issues such as:
Where is the business headed?
How will we get the business there?
How much will it cost us to get the business there?
What are competitors doing to keep us from getting there?
2. Establish an independent and engaged board of directors
Since most healthcare company owners are healthcare professionals who have learned how to be businesspeople through trial and error, they are often not accustomed to seeking advice from seasoned business professionals. That explains why some healthcare business owners believe that assembling a board or directors or advisory board will diminish their independence. However, board members can deliver significant value to business owners by sharing competitive insight, acting as a sounding board for new ideas, enhancing access to growth capital, strengthening company credibility, suggesting alliances, and more.
Company boards reduce CSR by providing strategy guidance, thought leadership, and hands-on experience. Viable businesses often have the support of a group of seasoned business professionals who have a genuine interest in the success of the company.
3. Develop a sustainable corporate culture
Many small to medium-sized healthcare companies have a corporate culture that mirrors the personality of the owner(s). As such, the culture may not be well-suited to capitalize on growth opportunities and may not foster a collaborative environment among disciplines and employees. Moreover, the culture may not actively and effectively develop future leaders throughout the company.
Effective corporate cultures help energize employees, attract new clients, improve the effectiveness of managers, and enhance company reputation. Developing a sustainable corporate culture reduces CSR by lessening the impact of high employee turnover, decreasing unethical behavior, and increasing positive employee interactions.
4. Set up an experienced and focused sales team
Few small to medium-sized healthcare companies have dedicated sales professionals on staff. Instead, they rely on generating business through the likes of referrals and company websites. While these are important for a company's growth, the addition of quality salespeople can be a difference maker. The right sales team can solidify relationships with patients/clients, gather critical feedback regarding the company's performance, and gauge and help a business respond to market trends. A quality sales team can reduce CSR by creating a pipeline of new patients/clients, reducing patient/client concentration, and enhancing barriers to competitive threats.
Why don't many small to medium-sized healthcare companies establish an experienced and focused sales team? Some healthcare providers are under the impression that governmental regulators frown on these kinds of activities. Others believe sales efforts are unprofessional in healthcare. Both perspectives are misguided. Larger healthcare companies almost always have a professional sales staff, which can make it difficult for smaller firms without a sales team of their own to remain competitive.
5. Create and adopt a marketing plan
A well-written marketing plan includes the duties and responsibilities of the marketing person or team, a detailed assessment of the target market, competitive analyses, and brand development, among other topics. A fully developed and adopted marketing plan helps reduce CSR by establishing and sharing knowledge of the company's target market and tactical plans to expand market share. Moreover, a marketing plan establishes a foundation for delivering the desired patient/client experience.
Some healthcare company owners believe that when a marketing plan is created, it will eventually collect dust on the shelf and never be reopened. What they fail to realize is that a functional marketing plan is never finalized. The plan should be treated as a living document that changes as the market environment and the company changes. The plan should also be regularly revisited, evaluated, and updated based upon factors including the success of marketing campaigns, identification of new marketing opportunities, and marketing efforts by competitors.
Learning the Value of Your Healthcare Company
Understanding CSR factors and how to mitigate them can significantly increase company value. To gain a better understanding of your CSR factors, learn about the value of your company, and find out ways you can potentially strengthen the value and performance of your healthcare business, reach out to me or any other member of the VERTESS team. We're help to help!
David Coit DBA, CVA, CVGA, CM&AA, CBEC, CAIM
I am a seasoned commercial and corporate finance professional with over 30 years of experience. As part of the VERTESS team, I provide clients with valuation, financial analysis, and consulting support. I have completed over 400 business valuations. Most of the valuation work I do at VERTESS is for healthcare companies such as behavioral healthcare, home healthcare, hospice care, substance use disorder treatment providers, physical therapy, physician practices, durable medical equipment companies, outpatient surgical centers, dental offices, and home sleep testing providers.
I hold certifications as a Certified Valuation Analyst (CVA), issued by the National Association of Certified Valuators and Analysts, Certified Value Growth Advisor (CVGA), issued by Corporate Value Metrics, Certified Merger & Acquisition Advisor (CM&AA), issued by the Alliance of Merger & Acquisition Advisors, and Certified Business Exit Consultant (CBEC), issued by Pinnacle Equity Solutions, and Certified Acquisition Integration Manager (CAIM), issued by Intista. Moreover, the topic of my doctoral dissertation was business valuation.
I earned a Doctorate in Business Administration from Walden University with a specialization in Corporate Finance (4.0 GPA), an MBA from Keller Graduate School of Management, and a BS in Economics from Northern Illinois University. I am a member of the Golden Key International Honor Society and Delta Mu Delta Honor Society.
Before joining VERTESS, I spent approximately 20 years in commercial finance, having worked in senior-level management positions at two Fortune 500 companies. During my commercial finance career, I analyzed the financial condition of thousands of companies and successfully sold over $2 billion in corporate debt to institutional buyers.
I am a former adjunct professor with 15 years of experience teaching corporate finance, securities analysis, business economics, and business planning to MBA candidates at two nationally recognized universities.
We can help you with more information on this and related topics. Contact us today!
Most successful companies reach points in their history where big decisions must be made that will determine whether these companies largely remain the same size and stay on their current course or undertake significant changes — and usually investments — that lead to a transformation in size and services. Successfully executing this transformation isn't typically easy and often introduces big risks to the viability of the company. For businesses that want to grow, taking risks is a necessity. Fortunately, business can also take steps to reduce the likelihood that these risks will backfire and potentially stifle growth or even cause financial harm.
In this column, I will discuss three types of companies — small, mid-sized, and large — and share key considerations for business owners and operators as they work to successfully move their companies up the growth ladder. Discussions of each company type will be accompanied by a real example of such a company that reached a significant growth turning point and the advice I provided or will be providing that can help turn risk into reward.
Smaller Companies
Let's start with a discussion of smaller companies, and we will define them as companies with revenue between $1 million and $20 million. These tend to be very service-forward companies that often cater to the whim of referral sources and are known in their communities as companies to go to when you want to work with somebody who cares.
That's not to say a larger company can't be a company that cares, but smaller companies tend to have that reputation. In addition, the competitive advantage and differentiator for a smaller company must be its service level — almost bar none. We are in an extremely mature industry that has been on the consolidation trail for a long time. This tells me that if you're a smaller company that wants to stay profitable, flourish, and grow, you need a service component that is your raison d'être.
I recently worked with a small(ish) home medical equipment (HME) company that specializes in diabetes care. It has a few branch locations. The company is known in its community as the company that will be there when push comes to shove. That's their best asset but also their worst detriment because they are known to be the go-to source for everything and anything.
This company recently decided to take on continuous glucose monitoring (CGM) as its next best product area of interest. The service line is being built by a few of the company's core staff members, and it is rapidly taking off. What this tells me is the company is ready to step outside the proverbial small "ma-and-pop" box and into a landscape where it will be able to achieve significant growth.
That's good news for the company, but it presents a big challenge. What they are contending with now is how to tell the community that the addition of this service line and its associated growth will require the company to pull back on being everything to the community all the time. The company still intends to help its customers with anything related to diabetes care because that is its area of specialty, which is supported by a pharmacy. But now the company will be focusing on the CGM line coupled with its CPAP business and other durable medical equipment-related items. That means changes are coming, including only providing one-off items within reason and needing to dropship items like a walker rather than personally deliver it. Alternatively, patients can drop by to pick up their equipment. It may also mean longer times between appointments for homebound CPAP patients and/or a need to deliver equipment and training remotely. And it means that for services that fall outside the company's wheelhouse, the business will refer customers to someone else.
One of the lessons learned for this small — and soon be a mid-sized — company is the importance of determining how to maintain a local feel without needing to be everything to everybody. That is requiring them to focus on the positives — the areas where they can excel as a business — and reduce or eliminate the negatives — the areas that do not make sense for the business. In other words, this company is cleaning up its house, making sure that what people see reflects the business in an accurate, positive way, and eliminating the nonprofitable products and business practices, with very occasional exception.
Mid-Sized Companies
Now let's move to mid-sized companies, which we'll say are those generating between $21 million and $100 million in revenue. They have many locations. They have good processes in place to support the business and growth, but now as they are scaling up and getting closer to becoming large companies, what they need is to become more consistent in the way they run their business.
What do I mean by this? For mid-sized companies, something that often gets overlooked is the notion of being centralized. This can be difficult because mid-sized companies have grown from the successful smaller companies that had a local feel and presence, but now with the larger contracts they have with insurance companies, these mid-sized company must be more consistent in the way they do their business across the enterprise. They must create "by rote" functions, to some extent. They must promote centralization of functions such as purchasing, for example. To further scale the company, non-routine or exception tasks should be reserved for leaders or higher skilled staff.
The challenge and opportunity here is how to achieve this consistency and continue growing without needing to add significant additional human resources that can cut into profitability. This points to the need for automation. Mid-sized companies must explore how to use automation and to begin exploring machine learning in ways they have not yet entertained.
Quickly emerging are the many companies offering services powered by machine learning. Mid-sized companies must start to look at these companies and their services as potential ways to continue to meet payer contract expectations and then be able to scale the company without needing to add extensive resources.
Consider that to handle orders that come in, mid-sized companies generally rely on people to process them. Sometimes that work is performed in-house; sometimes it's outsourced. But in either situation, it's a people-driven process. A person needs to go through the documentation with each order and find the chart note, the prescription (medical necessity form from the treating practitioner, and the other item-related documents. Then they need to electronically file these documents accordingly.
With machine learning, technology can do this work, with the solution essentially becoming the "fax wrangler." This doesn't eliminate the need for people. Rather, you take your really good processors and have them teach the machine what it needs to know and then have these people manage the machine and ensure the work is completed appropriately.
In a mid-sized company consulting engagement last year, one of the tasks I was charged with was coming up with a way to make more consistent use of their people. To do so, we centralized various responsibilities. For example, we created a centralized phone team. That was step one, and a valuable step that will help achieve consistency. What I find fascinating is a next step where the company would investigate how the use of machine learning may be able to reassign people on that phone team.
Let's say this phone team receives frequent questions about the status of a new order. Machine learning (also referred to as "digital experience" by some) should be able to proactively automate a text message to patients that confirms receipt of the order from their doctor, stating an update will follow within 48 hours. While this won't eliminate all calls about new orders, it should greatly reduce the number of calls that come in for order status and thus the number of people who need to answer these calls. In cases where automation is employed, companies have been able to reduce the number of inbound calls for order status by 75% or more.
The best places to start looking at where you should first work to incorporate machine learning are those aspects of your operations requiring the most human resource time, which are likely some of your largest cost centers. Once you've identified these pain point areas, determine what opportunities exist to introduce automation and eventually add machine learning to power this automation. This undertaking is one way to create a much easier and more consistent landscape for a mid-sized company to grow to the next level.
Large Companies
Now let’s discuss our final group: large companies with revenue greater than $100 million. These are businesses that are moving from being a regional player to a national player or a regional player moving into a new region. This growth is complicated because it often occurs through acquisitions, so now you are looking at melding different companies together. These companies have their own way of running their operations, with leaders who have had roles defined based on needs, personality, and demographics of a company. Following the acquisition, these leaders and managers are now being told that the way they have worked and the work they have done will need to change. Those can require difficult conversations and difficult changes.
What a large company needs to do is essentially look at each of the processes for the various companies now part of the larger entity and determine which ones perform the strongest and where large holes exist that need to be filled. For example, let's consider a company that has one contract that does not allow offshore billing and one contract that permits it. The company will want to look within its expanded operations to identify individuals who can champion these distinct efforts. Maybe Susie's company in Kentucky had a fantastic offshore company partner achieving great results. You might want to use Susie and her experience to champion the offshore billing efforts. For payers that do not permit offshore billing, you might find that Bobby's company in Rhode Island had impressive in-house billing performance, so he would champion that effort for the organization.
In larger companies, you typically have defined centers of excellence based on product mix and payer mix within each product. For example, you may have a large HME company with a center of excellence for urological and ostomy supplies and a separate center of excellence for CPAP and CPAP supplies. These centers of excellence are formed by larger companies dividing up the companies they've acquired first by their strengths (in revenue and collections), second by payer (contracts) that dictate how they are going to run their business, and third by product mix.
This brings me to a large client example and how this mindset would play out. One of my large clients recently finished a significant sized acquisition. But the post-acquisition transition is not going as well as they had hoped. Timely payments aren't as seamless as they had been previously because the companies haven't been merged well yet. People who are doing day-to-day work have been tasked with trying to merge the companies, but the work is just too much, and these people cannot focus on their daily tasks and simultaneously handle the merger tasks.
One recommendation for this large company is to assemble a dedicated mergers and acquisition transition team. If this large company is going to continue to pursue acquisitions, which I believe it will, now the company will have a dedicated team to handle merger-related functions, which would include creating centers of excellence.
An important caveat to using a transition team is the need to stay nimble and consider when growing the team would be worthwhile. Perhaps an acquisition necessitates the merging of software. If your transition team lacks a specialist in merging software, you will want to find this talent and add it to the team or use an outside contractor with this specific experience.
Once you have completed a merger, then a large company should further evaluate processes and determine what changes will help it get the biggest return on investment (ROI) based on payers and product mix. Do this by evaluating the best practices of each of the merged companies, including the original company, and determine the ROI from there.
Key Takeaways
I've covered a lot of information here, so I want to conclude by summarizing what I think are some of the key takeaways. For small companies, you must understand the nuances of going from ma and pa to the next stage where you are not and cannot be everything to everybody anymore. You must decide what you want to be "when you grow up." You still need to have a local feel, but inside your operation, your guts must be run much more efficiently.
When you get to the mid-size level, you need to rely on software to scale your company and find those people who will champion this cause. When you have the right people managing the optimal solutions that introduce automation, you will still be able to deliver an exceptional customer experience and achieve success. Lean on your heavy hitters when scaling your capabilities through automation and machine learning.
Finally, when you become a large company and are on an acquisition trail or you have completed an acquisition, you must understand which of the companies is better at payer and product mix integration. Then you must look at how you're going to fit in together as one team. A transition team that can effectively prioritize getting two distinct businesses combined will greatly help in that cause.
Regardless of your size, stay focused on your core competencies and best practices, then plan ahead and pivot as necessary to continue to flourish and profit in the ever-changing healthcare landscape.
Miriam Lieber President, Lieber Consulting LLC
Miriam Lieber is a principal consultant and trainer specializing in home healthcare revenue cycle management. Her extensive experience with Medicare and other third-party payers has brought her national recognition in the homecare industry. With over 25 years in the homecare field, Miriam has consulted with over 500 HME companies nationwide and is a featured author of many articles in the areas of operations management and leadership. She is also a nationally known speaker for many homecare trade associations. She can be reached at 818-692-1626.
COMMITTED TO CONSTANT IMPROVEMENT?
Want to stay current with trends in the medical/healthcare space as well as receive expert advice of veteran medical entrepreneurs?
SUBSCRIBE TO OUR BI-WEEKLY NEWSLETTER VERTESSPRESS
For over 10 years, we've been teaching ways you can improve the value of your healthcare company, focusing on informing you about mergers + acquisitions, including M+A trends in the healthcare market.
