Selling a healthcare company is a daunting task that requires significant foresight, planning and expertise in addition to the tremendous amount of time required to consummate a deal. For a first time seller, the process is especially intimidating as the owner begins the process that will ideally lead to a sale of the business at a price that accurately reflects the value of the business. With that in mind, I had the pleasure of interviewing Bill Siren of AlixPartners, LLP to discuss issues the owner of a healthcare business should consider when he or she has decided to sell their company.
MW: What is the first step that an owner should take to prepare the company for sale once they have made a decision to do so?
Siren: Once the owner decides that the time is right to sell the company, the owner should prepare the company so it can be shown to prospective buyers in the best possible light. These preparations include: (i) obtaining an initial valuation, (ii) conducting an independent, in-depth audit of the business and (iii) identifying areas where improvements can be made that will positively impact the company’s bottom line and operating metrics that prospective buyers use to evaluate a possible acquisition.
MW: What resources are available to assist the owners of a company to perform the initial valuation, conduct the initial audit and identify areas to improve performance?
Siren: Preparing to sell a company can be a very nuanced and delicate exercise. That is why it is important to hire a team of experts with industry specific knowledge to help guide the process and not just finance professionals. The ideal team should blend operational experience in the healthcare field with expertise related to financial modeling and the evaluation process undertaken by prospective buyers. Accredited valuation professionals with operational experience in the healthcare field will have the appropriate industry-specific knowledge as well as the expertise to perform an accurate valuation and audit and identify areas for improvement. These skills are critical in being able to increase the company’s attractiveness to prospective buyers.
MW: How does the initial valuation shape the process of selling the company?
Siren: The initial valuation serves as the starting point in negotiations with prospective buyers. A low valuation could be a sign that the company has room to improve its earnings performance; a metric typically measured by EBITDA.
MW: What are preliminary steps owners can take to improve earnings performance as measured by EBITDA?
Siren: If a company’s initial valuation is below the owner’s expectations and is a result of poor EBITDA, there are several steps an owner can take to improve earnings performance and, in turn, improve the company’s EBITDA. The first is to control expenses. The most common expense drivers that can be improved include supply agreements and pharmaceutical contracts, staffing, benefit levels for employees, overtime usage, etc. The next step is to review the revenue cycle. The improvements gleaned from creating efficiencies to get from patient registration to payment collection more quickly and reduce revenue leakage will fall directly to the company’s bottom line. Third, the company may need to improve its payor mix (if this is controllable). Depending upon the type of business, it is always advantageous to have a high percentage of commercially insured patients. Next, examine and evaluate the physical premises. The owner should make all necessary improvements. Prospective buyers will look for potential money pits and lower their offer accordingly if any exist. A buyer may also find additional value in an operationally efficient company supported by a physically sound infrastructure. Finally, rigorous due diligence should be conducted to ensure the thoroughness and accuracy of the company’s financial records. The company’s financial information should be completely transparent to any potential buyer. While not an exhaustive list, these are steps that can be taken to improve a company’s earnings performance and its attractiveness as a target to prospective buyers.
MW: How will any improvements made to the business improve the owner’s chances of selling or the purchase price for which he or she is able to sell the company?
Siren: The steps to improve performance, most notably EBITDA, not only make the company more attractive to buyers, but may also increase the price for which the owner is able to sell the company. The purchase price is often a multiple of EBITDA. Thus, a boost in EBITDA is augmented by the EBITDA multiplier and exponentially increases the purchase price. The business efficiencies that lead to stronger earnings need to be demonstrated and sustained for several months before the EBITDA number becomes reliable and can reasonably be expected to prompt a higher offer from a prospective buyer. With EBITDA as the dynamic variable, the purchase price can increase even if the multiple remains constant. However, the EBITDA multiple is not always constant. Improving the company’s operational efficiency may lead to a higher multiple where the buyer is willing to pay for an operationally sound company that it can easily fold into its operations without the added task of improving the company’s operations or upgrading its facilities.
---- To be continued.