11.17.2022

Tips for going to market in 2023

Looking to sell a healthcare agency next year?

Every transaction begins with detailed look at value, risk, and potential, according to SimiTree Associate Principal Mark Romano.

Whether you’re a small healthcare agency owner approaching retirement, a private equity investor ready to move on after a five-year investment, or a company executive overseeing a strategic divestiture of certain assets, knowledge is the key to stronger negotiations with more desirable outcomes.

The better you understand and define a healthcare agency’s market position and potential, the easier it becomes to find the right buyer, Romano said.

“You need an accurate picture to maximize value, mitigate risk, and market to the right buyer for your situation,” Romano said. The first two components of the transaction – value and risk – determine to a large extent who the buyer might be.

While some buyers demand a turnkey operation delivering quality care and optimal profitability from the outset, not every buyer will bring those expectations to the table.

A strategic buyer looking for geographic gains, for example, may be more interested in an ideal location than in current performance. That can create wiggle room for sellers with underperformance, who may not want to invest time or money in operational cleanup.

All buyers, no matter the intent behind the purchase, consider risk very carefully, Romano said. In fact, risk uncovered in clinical due diligence is more likely to scare away a potential buyer than any other aspect considered prior to purchase.

It’s a good idea to regularly assess risk even for agencies which won’t be up for sale in 2023, Romano said.

Risk assessment is one of three crucial steps for sellers preparing to head to market, according to Romano and other M&A experts at SimiTree, who outline those steps below.

Start with a professional valuation

“A business valuation is a relatively low cost starting point for a would-be seller,” Romano said.

It can also be eye-opening. While a business is generally worth a multiple of its earnings, determining the true value of a healthcare agency is a complex calculation based on more than its bottom line.

Value is also defined by market, performance, and potential.

A seller armed with a professional valuation heads to the negotiating table armed with valuable knowledge, and a business priced correctly with the right terms is likely to sell more quickly.

“You’ll want to make sense of the company’s actual value and not go into any negotiations or sign a letter of intent with an inflated or deflated value,” Romano said.

“A professional valuation will consider historical trends, the current market, and a number of other factors to tell you what you can realistically expect to get for your company.”

Next, understand the risk

There’s good reason clinical due diligence is the No. 1 Deal Killer in industry mergers and acquisitions, according to Romano.

Savvy buyers know that in heavily regulated industries such as healthcare, compliance is crucial. Risky billing practices and patterns invite time consuming and costly audit scrutiny by Medicare – and can result in demands for the return of overpayment or findings of fraud with potential civic or criminal liability.

“No one wants that,” Romano said. “Buyers want to know the risk vs. revenue, with current, accurate data.”

SimiTree offers full compliance assessments to identify areas where an organization is operating outside state or national norms, failing to meet industry standards, missing the mark in establishing eligibility and medical necessity for services, or making other costly mistakes.

Even a limited record review will pinpoint questionable payment patterns, clinical documentation errors or other compliance red flags. SimiTree consultants recommend an annual focused audit to determine clinical risk whether or not a sale is in the cards.

Spruce up accordingly

You wouldn’t put your house on the market without a little fresh paint and some attention to curb appeal. You might even reorganize the closets and clean the garage.

Most agencies need a little sprucing up as well, particularly when it comes to finances and accounting.

Many require a conversion from cash accounting, still common in the industry, to an accrual system, the preferred accounting method for transactional comparisons and data gathering.

A financial spruce up will include determining whether there are any variances in reported earnings and an evaluation of the efficiency and performance of the revenue cycle. Are there cash flow issues that need to be addressed?

Assessing compliance risk, determining healthcare agency value and updating systems and record keeping will greatly benefit an agency whether or not a sale takes place, Romano said.

“Even if you decide not to sell, it’s a good idea to fix things from a best practices standpoint,” Romano said. “And if you do sell, understanding your exposure, identifying and fixing your weaknesses enables you to be much more confident in negotiations.”

SimiTree can help

SimiTree’s M&A team offers a full range of professional services to assist home health, hospice and behavioral health providers in each phase of a successful transition, from business valuation and diligence to post close integration.

We bring a unique understanding of market dynamics and the complexities of our industry to every transaction, providing a detailed picture for buyers and sellers to move forward with confidence. Use the form below to reach out to us today for more information about our extensive, industry-specific M&A services, or read more about our services here.

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