Wednesday, December 28, 2011

Strategies for Sellers to Avoid a Retrade

In our last blog we talked about the tactic of “retrading” in negotiations, whereby typically buyers agree to a deal that they don’t really intend to go through with. Customarily, they drag out the due diligence process, strategically and deceptively, to wear down the seller to agree to concessions. Here are stratagems that you can adopt to avoid getting trapped in a retrade:

Avoid Long Exclusivity Periods – Don’t commit to exclusive negotiations and its correlate, the “no-shop rule”, for too long. Set date specific milestones for the end of the due diligence period, contract signing, closing date, "drop-dead" date and deposits forfeitability and set these for as short as possible. The more measurable time milestones you can set, the better. For a typical middle market deal, there is no reason for a due diligence to last beyond 90 days, with 60 days or less being more typical.

• Rawhide!!!– Remember the theme song of 60s TV program Rawhide
Keep movin', movin', movin',
Though they're disapprovin',
Keep them doggies movin' Rawhide!
Don't try to understand 'em,
Just rope and throw and grab 'em,

Move 'em on, head 'em up,
Head 'em up, move 'em out,
Move 'em on, head 'em out Rawhide!
Set 'em out, ride 'em in
Ride 'em in, let 'em out,
Cut 'em out, ride 'em in Rawhide.

Rollin', rollin', rollin'
Rollin', rollin', rollin'
Rollin', rollin', rollin'
Rollin', rollin', rollin'

In a deal, you have to keep those doggies rolling. The deal must move forward relentlessly. Any delays work in the buyers’ favor as the negotiating position of the seller is weakened because he is overcommitted to the deal. Don’t let the deal ever idle. All impasses need to be resolved quickly. A deal is either moving ahead, or it is cratering.

Keep Other Buyers Warm – Don’t kiss off losing bidders entirely. While you will be restricted in your communications with them in respect of solicitations, you generally can let them know what is happening without breaching the “no-shop” provision. In fact, you should insist that you should be able to inform the other potential buyers about the status of the process, without overtly inducing them to rebid. Ideally, try to insist on being able to talk to a “back-up” buyer, but usually the winning bidder is not going to acquiesce to that. You can try.

Don’t Leave Controversial Issues for Later – Any issues that could have an impact on the selling should be dealt with as early as possible, not at the closing table. If the issue is important and can have an impact on the economics of the transaction, you might as well know up front how that is calculated so as seller you can decide if that adjusted pricing is acceptable.

• Check Out Buyer’s Acquisition History - Most buyers have a track record that you need to investigate. If the buyer has a history of retrading, caveat emptor. You can continue with this buyer, but you will strategize and act smartly to avoid being a victim of this gambit. This is where having a Mergers and Acquisition Advisor could be very helpful.

• Set a Fixed Price Not a Formulaic One – Formulaic prices such as a certain multiple of EBITDA generally work in the buyers’ favor. The reason is any diminution of EBITA as closing is approached hurts the seller. The very act of selling a company causes internal disruption and it is very likely that business suffers somewhat during this uncertain and anxiety producing period. This is because of the growing insecurity employees experience once they find out the company is for sale; they start polishing up their resumes, looking for jobs, jockey for more security, ask for bonuses and act out in destructive ways. So therefore, if the business is priced by updating formula as a function of the trailing twelve months immediately before closing, the seller is likely to get short changed by a short-term atypical and non-recurring drop in company performance. The seller is better off setting a fixed price and both buyer and seller take the risk of income going up or down.

• Be Ready to Walk – There is old deal adage that the best deals are those they walked away from. The buyer has to know in their gut that they will walk if a retrade is tried. Similarly, the seller has to know in their gut, that they are ready to walk away and go back to running their business. Another benefit from walking away, is that the seller can fix the problems revealed by the buyer and to put the company back on the market later, fixed, improved and at a higher price.

Thursday, October 6, 2011

What is a Retrade?

If you look up "retrade" or re-trade" in the dictionary, you won't find it, even in dictionaries of slang. However, in the parlance of mergers and acquisitions, this is becoming a well-known term. Essentially, a retrade is the practice of renegotiating the purchase price of a deal by the buyer after agreeing to purchase at a higher price. Usually this occurs after the buyer gets the deal under contract and substantial time and investment has been incurred by both sides. In other words, this is a kind of "bait and switch". We are not talking about reasonable price changes as a result of due diligence and inquiry. By contrast, a retrade is a trumped up and disingenuous request for a material change in price and terms that is without merit and which is orchestrated at the end of the process. You know a retrade when you it hits you.

Some buyers as Mike Jagger says in You Can’t Always Get What you Want “are practiced in the art of deception.” They agree to a deal, particularly pricewise, that they really don't to intend honor. They drag the seller through a laborious and expensive due diligence and contract negotiation and believe that because the seller is so invested in the deal that they are worn out and worn down and will agree to a much lower price. Sensing weakness, the buyer goes in for the kill and calls for a retrade. That is how they end up with a bargain price or the price that they intended all along.

How to avoid a retrade? See our next blog coming up soon.

Friday, June 24, 2011

Guest Blog: The Change of Ownership Challenge when Buying Texas Long-Term Care Facilities

Just as surely as death is inevitable, so too apparently is the trend toward consolidation in the long-term care properties industry. Publicly traded companies and real estate investment trusts are rushing headlong into the marketplace to acquire privately held senior care chains and independent facilities. While most of these targets are being effectively managed and operated, their suitors recognize an opportunity to benefit from economies of scale. What’s more, long-term care facilities and the land they are built on can retain their value and actually appreciate in what is a very challenging real estate environment. Senior living and care facilities are an especially attractive growth market as more of the Baby Boomer generation approach retirement age. Baby Boomers moving into these care facilities is not a trend, it is the new normal.

So where are these companies shopping?

Florida and California, with their favorable demographics, have been popular states in the past. These days, whether because of market saturation or high real estate prices in other states, more and more companies are looking at Texas. If not the next frontier, Texas is a frontier for opportunity. In fact, over the last 12 months, dozens of companies have looked at Texas and some have actually started filling their cart.

Once at the checkout line, however, they have learned that closing such deals can be fraught with red tape. The primary challenge in Texas is that the application for licensure requires a level of disclosure that is higher than almost every other state in the country.

In particular, Texas requires the disclosure of all “owners” in a company, even owners of 5 percent or less – all the way up the ownership chain. Other ‘controlling persons’ must also be disclosed, but the state’s definition of what is a ‘controlling person’ is ambiguous. In the past, companies have come to us right before a deal is finalized, with the hope that transferring the licenses will be a short, final step. Unfortunately, we have to tell them that transferring the licenses is not an easy process.

Our first step in representing such a client is to contact the appropriate people at the state level and answer as many questions on the front end as possible. We then work with both the state and the federal government, through its Medicare agent in Texas, called “Trailblazer,” to get applications filed.

After the paperwork is filed, the state and Trailblazer will have questions. Outside legal counsel must know how to respond to questions about complex transactions that do not fit neatly into state and federal change of ownership forms. This means serving as translators, bridging the terminology gap between national deal-makers and local regulators.

The licensure and change of ownership process in Texas is complicated as it is, but it is also continually evolving to try to accommodate new ownership structures. For example, last summer the state changed the rules to clarify that when it comes to publicly traded corporations, shareholders and lenders aren't controlling persons’ for purposes of disclosure. If a new owner or a buyer did not know this ahead of time, they could have wasted a lot of time trying to figure out whether to disclose certain information about these groups.

This predicament for national companies is really a catch 22. On one hand, these challenges are not going to go away any time soon. On the other, neither is the value inherent in these properties. It places a premium on finding outside counsel with experience and familiarity in working with these specific state entities, streamlining the acquisition process and allowing the company to move forward with what it does best – whether it is purchasing, managing or operating long-term care facilities.

by Cory D. Macdonald. Mr. Macdonald is the lead attorney of the long-term care and retirement housing practice group at Davis & Wilkerson. He represents continuing care retirement communities, hospitals, skilled nursing facilities, physicians and other providers in a variety of issues including business formation, state licensure, Medicare/Medicaid certification, regulatory compliance, risk management, and the sale and acquisition of health care facilities.

Saturday, March 26, 2011

Preparing Your Company For Sale

You’ve invested heavily in building and expanding your healthcare business, and now you’re considering selling. Regardless of why you’re selling—retirement, burnout, the spin-off of a non-core business, or taking advantage of high prices in the marketplace for your type of enterprise—you’ll need to provide potential buyers with a detailed set of information about your business. And that’s easier said than done.

Very often, mid-sized healthcare companies invest heavily in quality care and state-of-the-art medical technology, neglecting the financial and operational systems they need to provide the type of information buyers require. It’s not unusual for a client to tell us, ‘We know the results of our business; we just cannot document it well.”

Due diligence on a healthcare business involves a thorough examination of financial, utilization, and market data to verify results and develop projections. A buyer is unlikely to invest an inordinate amount of time and money reconstructing the business’s results from scratch; there are always other buying opportunities.

Regardless of the true profitability of the business, if you cannot readily document the outcomes and provide consistent information to potential buyers so they can verify your business results and feel confident in the soundness of their investigation and analysis, you will not be able to maximize the selling price of your business. Preparing for the successful sale of a health care business involves work in three main areas: Financial Systems, Professional Accounting Methods, and Market Positioning Research.

Go Beyond the Income Statement

Very often, we find mid-sized healthcare companies using an off-the shelve packaged accounting program such as QuickBooks for cash management and a proprietary program for medical utilization, billing, collections, clinical information, and scheduling. Because there’s no correlation between the two programs, revenues are not tied into volume, types of services, or patient days by payer source. If a buyer wants to know about the volume, type, and payers of services making up the revenue number in the income statement, this information must be derived from a separate database.

The information can be collected from service logs, but the revenue to units to service linkage must be reconstructed, a tedious task most buyers are reluctant to undertake. This will reduce the number of prospective buyers, resulting in a less competitive bidding process and a lower price.

The buyers who choose to explore the transaction will need a long time to complete the evaluation, which can lead to a significant disruption of business operations caused by outside inspectors and the specter of the company being “in play.” Companies with state-of-the-art information systems can cross-tab any set of financial, operational, and clinical data variables and produce a report with a few keystrokes.

Healthcare executives sometimes fail to understand that an income statement alone is insufficient to evaluate business results. It’s true that net operating income is a major determinant of a company’s value, but a buyer cannot have confidence in the net income number unless the seller can document service units, costs, and pricing behind the numbers.

Invest in Accounting

Many healthcare service providers fail to hire qualified financial professionals to manage their financial and accounting systems, believing it’s too expensive relative to the size of their business. The result is that financial records are to manage their financial and accounting systems, believing it’s too expensive relative to the size of their business. The result is that financial records are managed by a less costly, but less qualified bookkeeper who lacks extensive accounting training.

Quite often, these inexperienced accountants produce inconsistent financial statements. The bottom line may be correct, but they record expenses differently by category month by month, making business expenses difficult to track. If there is high turnover in this position, the problem is exacerbated: each new bookkeeper records expenses in their own way. The solution is to invest in qualified financial and accounting professionals. It’s not inexpensive, but it will pay off when it comes time to sell the business because there will be reliable financial statements.

Another benefit of having financial professionals on board is that when it’s time to sell the business, these individuals can compile the information and intelligently respond to questions and requests for additional data during the due diligence phase. This spares owners considerable time during the sale process, allowing them to continue devoting their energy to maintaining the business. When owners spend a large amount of time on the sale of their business, they tend to lose focus on the operations, adversely affecting the valuation as closing approaches.

Know Your Market

Most small and mid-sized healthcare businesses are uninformed about their competition, failing to collect sufficient information about market-share and the competitive environment. But knowing your business’s market area, demo-graphics, upside potentials, and strengths and weaknesses compared to competitors is important in determining its value. It’s a good idea for you, as the seller, to have this information to make a strong case, rather than leaving it up to the buyer.

The buyer will usually hire an external marketing consultant who is unfamiliar with the market. He or she spends a day or two in the field and in the office collecting and analyzing secondary data and presents their “expertise” on the market you’ve spent years cultivating. They almost always miss the subtleties of the market. As the seller, you’ll be in a better position if you can define your market’s characteristics and needs for the buyer.
The successful sale of a healthcare business depends on making quality information about your enterprise available to buyers as they look to corroborate the business’s results, make projections, and price the transaction. Investing in an integrated financial and utilization database, high-caliber financial professionals, and market data will help you maximize the selling price and facilitate a speedy transaction.