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.