A few months ago, I joined VERTESS as a managing director. I became a member of this great team because I want to help healthcare business owners successfully sell their companies. I also want to ensure our clients do not experience what I did when I sold my business.
The Background
I graduated undergrad with a degree in economics with a premedical emphasis. My expertise was in the analysis of financial statements, largely of publicly traded companies. I worked for the S&P 500 for a little while but found myself lacking passion and was eager to find a career that would give me a more purpose-driven life. I decided to get into senior home health care. I held positions at a few impressive home care agencies and then decided in 2002 to start my own agency in Colorado. I believed I could provide senior home health care services to seniors in the state better than anybody else.
The belief in myself paid off. By 2008, through organic growth and small add-on acquisitions, my agency was generating about $8 million in revenues. We had three branch locations and operated from northern to southern Colorado. We were a top-tier agency providing the full continuum of senior home health care, which was highly attractive to buyers at the time.
While I wasn't interested in selling my agency, my hand was essentially forced due to a divorce. A buyer reached out and expressed significant interest in my agency. Representatives of the buyer, including its owner, flew to Colorado for a meeting at a restaurant airport. The buyer was prepared to generously reward me for the tremendous amount of work I had put into my company and the success we had achieved.
It seemed like we were heading to an outcome that would see me making the best of a situation I didn't want to be in. I handled all the negotiations with the buyer. While I had some previous experience with mergers and acquisitions (M&A), I was by no means an expert. This wasn't a concern at the time as I thought that the buyer had my best interests at heart, and everything with the acquisition of my agency would be done on the up and up. What can I say? I'm an eternal optimist.
Ignorance Is Not Bliss
My naivety came back to bite me. The buyer's attorney eventually took the lead in the negotiation process, and he was supported by an external accountant. Unfortunately, I didn't recognize that what had been a "human transaction" involving a buyer that seemed to prioritize my wellbeing became a deal all — and only — about numbers.
And the numbers weren't going to end up pretty for me. I received a good offer on paper, which combined what seemed like fair figures for cash, an earnout, and stock. I was working with a broker who was referred to me, but I didn't know this broker had represented the buyer. Same with the attorney who was recommended to me. These were clear conflicts of interest, but I did not discover them until after the transaction.
Right before we closed, the buyer said we should make a 338(h)(10) election, which I later found out can greatly harm a seller's finances due to tax implications. The buyer also included some carefully worded language in the contract with stock implications, which I missed, and my broker and attorney failed to discuss with me. The buyer's representatives said all the right things to keep me moving forward toward the sale. They said they wanted me to remain on for a year to help with the transition and would make up for any shortfalls through my salary.
In the end, my rose-colored glasses betrayed me. My stock ended being worthless, and I never received an earnout. Following the transition year, I walked away from my company with nothing except my initial cash.
That was devastating. I put my blood, sweat, and tears into that organization. I gave up time I could have spent with my family growing the organization — in part because I wanted to help more people through our services, but also because I believed the work would pay off financially and enable me to better support my family. While I was able to achieve the former, positively impacting many people's lives, I felt robbed of the latter.
The Lesson Learned
Where did I go wrong with selling my company? I don't want to put too much of the blame on my optimism and the belief that people are generally good. My work in the senior home health care space has shown me this is largely true. But the reality is that when it comes time to sell your company, you cannot afford assumptions. Buyers are looking for good deals, and some will try to take advantage of inexperienced sellers.
I recognize that where I went wrong was that I lacked good representation in the transaction. Engaging with the right M&A advisor, knowledgeable in home health, free of conflicts of interest, and whose responsibility was to have my and my company's best interests at heart, was the key to my receiving fair value for my company. During my sale, I did not have this kind of representation, and I paid the price.
This brings me back to my joining VERTESS. I'm in the last leg of my legacy. I have three grown children and one smaller child. I decided I wanted to finish my career doing purpose-driven work. Despite my success owning and operating home health companies, I was no longer finding joy from C-level operations.
I met with VERTESS' leadership and instantly knew that this was the right firm and right work for me. I had my doubts about a career in M&A because I had largely soured on these professionals due to my transaction experience, but the VERTESS team shows that not every M&A firm is only interested in getting deals to the finish line and earning commissions. The team is largely comprised of past owners and operators of healthcare business. We understand what it takes to grow a business, including making huge sacrifices, and what's required to get to a place where buyers are willing to pay a generous and fair amount for a company. We know the importance of finding the right buyer — one capable of making a good financial offer and who will help the business they are acquiring continue to grow and thrive.
We also understand that when it comes to transactions, the devil is in the details. A little mistake or oversight can jeopardize a deal or lead to an unfair outcome for a seller. We support one another at VERTESS and collaborate closely with the other members of a transaction team, like an attorney and accountant, to ensure no important detail is missed.
Most importantly, we are motivated to help our clients succeed. Our team has been in their shoes, which is why we follow our form of the golden rule: We do unto our sellers as we would want someone to do unto us. As you might imagine, this is very personal for me given what I experienced — and what I hope no one else experiences.
My story shows that choosing the right representation may be the most important step you take to prepare for selling your company. When that time comes, I hope you will reach out to VERTESS. We'd love to learn about you and your company's story and help provide the happy ending for your business that you deserve.
Christine Bartel, MBA/MHA, CSA
Before joining VERTESS, I served as a senior healthcare executive for 26 years. My expertise includes CEO and COO functions, which produce dramatic improvements in financial performance through acquisitions, joint ventures and, service line development. I am experienced in the full continuum of care, with a deep understanding of how new federal and state policies impact the bottom line. After working as a statistician at Standard & Poor’s Compustat and a financial analyst at Dun & Bradstreet Corp., I began a career in health care and, in 2002, started a home care services company in Colorado. Serving as the CEO, I supervised a staff of approximately 350 caregivers, established two branch locations in Colorado Springs and Fort Collins, and ultimately sold the company to a private equity firm in 2008. Since then, I launched an independent consulting practice that acquires underperforming health care entities, delivers strategic guidance and an array of management services to diverse healthcare organizations, facilitates with interim/long-term senior leadership operational turnarounds, joint ventures, facility expansion, service line development, and mergers and acquisitions. I also coach health system executives, physician groups, assisted living facilities, skilled nursing facilities, insurance companies, and post-acute organizations.
I earned my Bachelor’s Degree in Economics from the University of Colorado Boulder and an MBA from George Washington University. In 2012, I received my Certification as a Senior Advisor (CSA). Lifetime achievements include raising four beautiful children, hosting “Aging Independently with Christine Bartel” on CBS Noon News, and authoring “Redemption, The Christine Bartel Story.” I received the women-related Corporate Social Responsibility/Bronze Stevie Award in 2018, was featured on the Inc. 5000 list of the fastest-growing private companies in America (ranking 1908 out of 5000) in 2018, and was honored as the Female Executive of the Year/Gold Stevie Award Winner in 2017.
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FORT WORTH, Texas, Nov. 15, 2024 /PRNewswire/ -- VERTESS (https://vertess.com), a leading healthcare mergers and acquisitions (M&A) advisory firm, is pleased to announce that Momentum (https://momentumme.com/), a Maine behavioral health provider that offers shared living and other services to people with intellectual and developmental disabilities, has joined the Mosaic (http://www.mosaicinfo.org) family. Momentum is now part of Living Innovations (http://livinginnovations.com), a service of Mosaic. Together they have increased their reach to people with diverse needs in Maine, New Hampshire, Rhode Island, and Connecticut. The transaction was facilitated by the VERTESS team and Rachel Boynton.
Living Innovations offers community-based services to 950 people, including more than 500 individuals who participate in shared living. They also provide vocational services to 204 people. Momentum serves approximately 270 people through its shared living and other community-based programs. Living Innovations State Operations Director, Andy Taranko, shares, "Momentum is a trusted organization that has innovative programs like Nature Trek and a strong reputation for quality. It is a natural fit for the high-quality services Living Innovations provides across Maine." These two organizations will serve about 1,500 individuals through shared living, community support, and employment services.
Dennis Strout, founder and Executive Director of Momentum, noted that his decision to become part of Living Innovations was greatly influenced by his desire to ensure the services provided continued long into the future. He shares, "The Momentum workforce has helped people achieve incredible things, and Living Innovations brings new levels of support and resources, a welcome addition to provide long-term stability for the services."
"I enjoyed working with the professional teams at Momentum and Mosaic in support of their goals," stated David Coit, VERTESS Director of Finance and Valuation. "Having worked with Living Innovations previously in their acquisition by Mosaic, I am excited to hear of future successes for the group."
Volume 11, Issue 19, October 10, 2024
By: J. Blake Peart, RRT, CM&AA
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!
FORT WORTH, Texas, July 16, 2024 /PRNewswire/ -- VERTESS (https://vertess.com), a leading healthcare mergers and acquisitions (M&A) advisory firm, is pleased to announce the successful completion of a third pharmacy deal this year. This deal closely follows two additional pharmacy transactions completed in Q2.
Keystone Specialty Pharmacy (https://keystone-pharmacy.com/), a customized, specialty pharmacy out of Mississippi, was purchased by Novastone Capital Advisors (NCA) (https://www.novastone-ca.com/index.php), a Switzerland-based private equity firm, as part of their Entrepreneurship through Acquisition (ETA) Program. Keystone prides themselves on offering health care providers new resources to treat serious infections while also being committed to maintaining the highest ethical standards in business. Dr. Lisa Piercey, NCA's Entrepreneur, will lead the pharmacy as it continues its mission of providing critical care.
The transaction was overseen by VERTESS Managing Director, Alan Hymowitz, who previously owned and operated a pharmacy before his tenure at VERTESS. His unique background was invaluable in leading this transaction to a successful conclusion. He noted what a demanding and lengthy process this transaction was, but that he is thrilled for his clients to see this deal across the finish the line.
Keystone owners, Jeffrey and Kim Clark, reflected on the transaction process sharing, "Alan Hymowitz and the team from VERTESS understood the importance of finding a strategic investor who would continue our mission 'Our goal is to heal and not refill.' VERTESS found the ideal fit for our pharmacy, one who we have confidence will take care of our patients with excellence while expanding the business we started. We are extremely grateful to Alan, David Coit, and the rest of the VERTESS team for their diligence and expertise in bringing our deal to close. Their guidance through this process has been a blessing to us both."
For more information, please contact Vaughne Glennie at 380413@email4pr.com or +1.520.395.0244.
Volume 11, Issue 12, July 2nd, 2024
By: David E. Coit, Jr., DBA, CVA, CVGA, CM&AA, CBEC, CAIM
Why should a buyer's costs of integrating an acquired company be of interest to the seller? The most important reason is that sellers often pay part or all the integration costs of the buyer. According to McKinsey & Co., the average cost of integration is between 15% and 20% of an acquisition's purchase price.
How do buyers' integration costs become a concern for sellers? Buyers typically determine the offering price based on expected future cash flows received from the acquired company. When buyers estimate future cash flows, they often include the anticipated costs of integrating the acquired company. Thus, the purchase price is often net of the buyer's expected integration costs.
If you're considering a sale of your healthcare company, you might be wondering: What can I do to influence the buyer's cost of integration?
That's a great question! There are several actions sellers can take before going to market that can reduce the buyer's integration costs. Moreover, those cost savings may allow potential buyers to increase their offering price because of a perceived increase in first-year cash flows from the acquisition.
How to Cut Healthcare Acquisition Integration Costs
Let's discuss eight areas where sellers may want to take steps before selling their company that can reduce a buyer's integration costs and potentially increase offers and the final sale price.
1. IT software applications
Buyers typically migrate the information technology (IT) used by an acquired company to match the applications the buyer uses. Software migration can be a costly and time-consuming process, especially if the seller is using legacy systems and outdated technology, in-house developed software, and/or has inaccurate or incomplete data. On the other hand, using widely used, industry-specific applications and having clean and current data will considerably ease the migration process.
In addition, providing buyers with a listing of IT applications used, the methodology of data collection and data verification, and a scheduled IT software maintenance program will allow buyers to better determine the estimated time and expense of IT integration.
2. Repair and maintenance
Believe it or not, some sellers defer routine repair and maintenance in the months leading up to the sale of their business. While this may seem like a good way to increase the seller's cash flow before selling their business, buyers will likely discover such deferred expenses during due diligence and predictably take a dim view of such actions. Moreover, buyers will estimate their costs of remedying or mitigating the deferral.
It's better to keep up with scheduled repairs and maintenance as though the business wasn't being sold than having buyers decrease their offering price to account for these necessary expenses. However, sellers should not needlessly incur excess repair and maintenance costs before going to market. Keep in mind that companies sell for a multiple of cash flow. As such, every dollar increase in cash flow returns a greater dollar amount in the price of the company.
3. Turnover
Buyers usually expect a post-acquisition drop in the acquired companies' revenue due to employee turnover, client/patient turnover, or referral source turnover. A key aspect of integration is the retention of essential employees, clients/patients, or referral sources.
If the seller can show buyers that they've taken and will continue to take actions to mitigate turnover, buyers will be less concerned about revenue loss and the associated costs of retention. In addition, sellers who demonstrate a commitment to work after the sale to address possible retention issues show good faith to prospective buyers.
4. Capital expenditures
Buyers often expect that sellers have underinvested in capital expenditures (Capex) leading up to the sale of their healthcare businesses. Appropriate investment versus underinvestment is a difficult issue to address. On the one hand, replacing older equipment does not necessarily increase the offering price from buyers. On the other hand, buyers may adjust their offering price after due diligence once they've determined the estimated costs associated with underinvestment.
A good rule of thumb is to continue Capex dollars based on historical needs. In other words, consider keeping up with maintenance Capex but limit the amount spent on long-term growth Capex. The most typical underinvestment in Capex is new computers for employees. Beware of acquiring new computers that may not meet the buyer's IT specifications. In other words, be smart and frugal with CapEx dollars before going to market.
5. Facilities
Before interacting with potential buyers, a seller won't know the facility needs of buyers. Many buyers don't want to own real estate. Others may have operations with excess capacity near the seller's location(s).
Perhaps the best way to address the issue of facilities is (1) the seller should not undertake any leasehold improvements before going to market, (2) sellers should avoid long-term lease extensions or related commitments, and (3) if the facility(ies) is/are owned, consider looking into alternative options should the buyer chose not to acquire real estate. Sellers don't want to be in a position where the buyer decreases the offering price because the seller needs to unwind facility(ies) commitments.
6. Open staff positions
It's commonplace for sellers to avoid filling open staff positions before selling their business. Such situations can be a two-edged sword. The buyer will discover unfilled positions during due diligence and factor in the cost of filling the positions by repricing their offer. On the other hand, the seller may be able to fill open positions at a wage rate or salary lower than the buyer's estimated compensation. Conversely, the buyer may be able to fill certain open positions where the buyer has existing staff to fill open positions.
I recommend the seller discuss this matter with their healthcare M+A advisor or potential buyers before the buyers make an offer to acquire the business. One other consideration is the potential to outsource open positions with independent contractors. For example, contracting with a fractional chief financial officer rather than hiring a full-time CFO.
7. Contracts, licensing, certifications, and subscriptions
Buyers will discover any past-due, expired, or soon-to-expire contracts, licensing, certifications, or subscriptions (CLCS). Sellers should keep essential CLCS' up to date. However, before going to market, sellers should evaluate each CLCS to determine the value of reviewing or extending the CLCS. For example, older certifications may be of little value because of changes in the industry. Similarly, certain subscriptions may not be of value to buyers and thus an unnecessary waste of funds.
For example, some physicians elect to be members of various associations like the American Medical Association, Medical Group Management Association, and/or state medical societies. If these CLCS do not drive revenue or business value, consider not renewing the CLCS.
8. Accounting/financial reporting
We regularly advise our clients whose financial reporting is on a cash basis to convert to an accrual basis before going to market. Accrual basis accounting is a more accurate method of financial reporting than cash basis accounting. We also recommend that their accrual basis accounting conform with generally accepted accounting principles (GAAP).
One way to ensure that a company's financial statements are GAAP compliant is to have a CPA firm perform an audit. Audited financial statements can provide buyers with confidence in the reliability of the financial reporting.
An alternative to having audited financial statements is to have an accounting firm prepare a seller's quality of earnings (QofE) examination. A QofE is an assessment of a company's performance that removes anomalies and poor accounting or bookkeeping methodologies, and more accurately reports a company's true performance.
Many buyers will undertake a QofE as part of their due diligence process. When sellers provide buyers with a seller's QofE report, as my colleague Bradley Smith discussed in this column, buyers gain confidence in the accuracy of the seller's financial reporting.
Moreover, buyers may either accept the seller's QofE rather than having a third party perform a QofE or hire a CPA firm to review the seller's QofE report. In either case, the buyer saves time and money and will be able to quickly determine the riskiness of the seller's company.
Impact on a Potential Healthcare Acquisition
Imagine you are looking at acquiring one of two healthcare companies in your industry. One of the companies uses similar IT software applications as you; keeps current on routine repairs and maintenance; has a sound record of low employee turnover; has no underinvestment in Capex; has the option to renew their facility's lease (which is now month-to-month); has no unfilled staff positions; is current with all contracts, licensing, and certifications; only has necessary subscriptions; and has accurate and verified financial reporting.
The other company is using proprietary or in-house developed IT software applications, is significantly delinquent in routine repair and maintenance; has higher than usual employee turnover; is underinvested in Capex; has a long-term facility lease contract on an undesirable property; has several unfilled open staff positions; is past-due on renewing contracts, licensing, and certifications; has many unnecessary contractual subscriptions; and has numerous accounting errors in their cash basis financial statements. Which company would you be willing to offer a higher purchase price? Which company would you perceive as a risky investment? Which company would you expect to spend less money on during integration?
It's easy to see how putting in some work to reduce acquisition integration costs can lead to more offers and higher offers while increasing the likelihood of a successful sale. If you are thinking about selling your healthcare company and would like to discuss ways to decrease acquisition integration costs and make your business more appealing to prospective buyers, reach out to me or any other member of the VERTESS team. We would welcome the opportunity to speak with you!
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.
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Preparing an ambulatory surgery center (ASC) for a sale is a worthwhile process for center owners regardless of whether they intend to sell their facility in the near future. The process examines an ASC from a potential buyer's perspective, generating tremendous insights into where an ASC is thriving (what a buyer would find attractive) and where it needs improvement (what a buyer would find troublesome). With this information, owners can undertake initiatives that would further strengthen the ASC's infrastructure and operations, likely leading to financial improvements and increased competitiveness while putting the center in a stronger position for an eventual sale.
The following are six key recommendations for how ASC owners can run a more successful center — recommendations that will also set owners up for a successful sale.
1. Think about growth from the start
When opening a new ASC, owners are typically hyper-focused on getting to the finish line so they can open the doors and start performing procedures. But at least some energy and resources should go toward building a strong business foundation. Doing so will not only help an ASC succeed, but it will become more attractive for investors.
Among the key steps owners should take early in the ASC's development include assembling business and supply teams with healthcare and preferably ASC experience who can keep owners current on performance, trends, and developments. Owners should ensure they or their administration carefully research software choices and revenue cycle management (RCM) service partners if they intend to outsource some or all of RCM. Also, prioritize ensuring processes are not duplicated and automation is fully leveraged wherever possible.
2. Develop a basic exit plan when you're developing the ASC
Another important step to take early in an ASC's history — and likely even before the ASC opens — is understanding the future exit plans of your physicians and business partners, even if it's many years away. Such alignment is essential early and only becomes more critical as owners approach their exit phase. When you choose physicians to work at your ASC, they must be willing to purchase equity in the center, be willing to work under the umbrella of a corporate entity, and be receptive to an eventual acquisition.
One of the biggest mistakes a physician-owner can make is selling their ASC when they are ready to retire, unless certain steps are taken in advance. These include keeping the business scalable and making the transfer of vendors, maintaining employee retention, and keeping a transferable payer structure top of mind.
Also, be careful not to have one or just a few physicians perform a majority of your cases unless you are confident that these physicians will buy in to an acquisition. This will be critical to a buyer's ability to acquire your center or become your strategic partner.
A key test when preparing your ASC for an acquisition is to assess what would happen if you took a vacation for 4 weeks. If the business would still run smoothly and continue to perform well financially, the center is likely in good shape for a sale. If a vacation of 4 weeks would cause significant harm to profitability and operations, this should be viewed as a red flag.
3. Take time to understand the business side of running an ASC
ASC owners cannot afford to be absent from the business side of the facility. A lack of engagement can lead to poor decisions that harm financial performance, hinder growth, and lead to a disappointing exit. Owners should take the time to understand critical concepts like acceptable accounts receivable ranges, bad debt, and key performance indicators, and the benchmarks for the costs of clinical and non-clinical staffing.
Owners would be wise to pay market salaries and distributions to themselves and their partners as anything above market is likely to be frowned upon by a prospective buyer and new partners.
When hiring staff, seek professionals who are likely to remain with the ASC following an acquisition and generally avoid hiring and promoting through nepotism unless the individuals are qualified and expected to remain on staff when there is a transfer of ownership.
Owners should understand and be involved in vendor contact negotiations to help achieve cost savings for their ASC.
Finally, if possible, owners should surround themselves with physician-owners and non-physician-owners who have been through acquisitions to help with understanding the process and what's required for success.
4. Conduct periodic self-audits to identify opportunities for improvement and growth
Don't develop an ASC that has a mentality of: "This is how we always have done it, so we are not going to change." Change is critical to success, both when change will correct a problem and when change will improve performance.
How do you discover what you should change? Conduct internal audits, and be proactive in preparing for surveys, such as those conducted by your state and accreditation organization. Provide continuing education for staff, have a thorough onboarding orientation process for new hires, and encourage team members to always speak up when they have suggestions or concerns (i.e., creating a "just culture"). Build a culture that protects your patients backed by policy and supported by best practices.
5. Prioritize treating patients, but don't lose sight of the business
Patient safety and quality of care are always first, but if you don't manage your expenses and pursue growth opportunities when they present themselves, you may end up with the best ASC that went bankrupt. And a bankrupt ASC can't help patients.
6. Step up sales preparation several years in advance
While planning the exit from your ASC should be an ongoing process, there is an optimal time to step up your preparation. When you believe you have about 5 years left of performing surgical procedures, begin to more seriously consider your exit and seek ways to further increase value and buyer interest in the center.
This is also a good time to list the center and consider taking on a strategic partner, especially if you're interested in maximizing your earnings from the sale through a rollover (i.e., equity roll).
The Sooner You Start Thinking Sale, the More Successful You Will Be
If you own an ASC and are thinking it's time to sell your facility or if you're wondering what you can be doing to best position your center for a sale, I'd welcome the opportunity to speak with you and talk through your opportunities. Please contact me using my information below. If you're interested in learning more about how to know when it is time to consider a strategic partner, I discussed this topic on the HST Pathways "This Week in Surgery Centers" podcast. You can listen to the episode on YouTube or through platforms like Apple Podcasts and Spotify.
J. Blake Peart RRT, CM&AA
I have had the opportunity of an extensive and diverse career in healthcare for over twenty years. In the past ten years, I have served as CEO for multiple hospitals of Fortune 500 companies and CEO for several large Ambulatory Surgery Centers. In addition, my operations and business development knowledge has allowed me to experience the entire M&A process from start to finish focusing primarily on private equity transactions. My history as both a CEO and clinician provides a unique perspective based on years of experience and empathy when working with business owners seeking M&A advice. My expertise is in Ambulatory Surgery Centers, Physician Practices, and independent hospital businesses. I am here to support healthcare business owners who select the M&A direction as one who has walked in their shoes. I know that every transaction is unique and tailored to a seller’s need in getting the best deal and providing a positive experience throughout the entire process.
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