Considering selling your healthcare business? Or maybe you are in acquisition mode. Either way, Dan Roth — Managing Director at The Forbes M+A Group — touches on the do’s and don’ts of selling or buying a healthcare business.
His knowledge will be a real eye-opener for you and is the difference that makes the difference. If nothing else, it will help you determine how to price a sale or a purchase of a business in the healthcare industry.
It All Comes Down to Fundamentals
“Selling the company starts today,” says Roth.
Unfortunately, many healthcare business owners don’t even think about selling their company or physician practice until they get late in the stage of ownership or a prospective buyer approaches them. Business owners should always focus on building a company that will be attractive to buyers from day one. Buyers look for key things that are considered fundamental but unfortunately many owners are lacking:
- Quality Financial Statements — ensure you can produce a profit and loss statement
- Build Autonomy — develop your business in a way so that you (the owner) do not need to be there to keep it running smoothly
- Customer Concentration — spread revenue across many different customers so that there is not more than 5-10% with a single source to eliminate the risk
Tip: Roth recommends providing proof of recurring (monthly) revenue if possible to increase the estimated value of your business. Having less project-based and more contract or retainer-driven revenue can make your healthcare business more attractive to buyers.
Sell the Business While Still Climbing (Not at Apex)
“The typical mentality of an owner who hasn’t sold a business before and doesn’t have a lot of experience in this area is to sell their company at its peak,” said Roth. “But the problem with that is buyers know the business is at a peak, and will essentially feel they are buying at the top of the market with little to no room to improve the company.”
What owners need to realize is that buyers only make purchases that offer a return on investment. Buyers want to know that when they invest in a healthcare business they are able to grow it over the next 2-5 years to make it more profitable.
Tip: As a business owner you’ll ideally want to sell 2-3 years before a peak. This is when the forecast looks the best and most profitable to prospective buyers.
Source a Trusted Advisor
Investment bankers are more or less built to get inside of a business owner’s head or company to fully align their own understanding with each completely. They figure out how to tell the story of that entrepreneur or business in a way that’s compelling to buyers.
“I believe, it’s always better to have somebody telling the story for you, because, for example, I can brag about somebody more than they are able to brag about themselves,” said Roth. “Most people try to present a level of humbleness — when selling a business that might not serve you so well.”
When you have an advocate who can help sell the narrative of your company, that will position your business to a buyer in a better way. However, the converse is also true. If you feel confident in singing your praises solo, that has the potential to be off-putting to buyers.
In short: having an objective third party that is able to speak on your behalf (to some degree dispassionately but enthusiastically) about the attributes of your company is a critical component of successfully selling your healthcare business.
Acquisitions are on the Rise (Again)
“The activity of acquisitions in the healthcare space continues to be remarkable,” said Roth. “Even looking back to last year with COVID, and not just in healthcare but all different sectors, while things slowed down significantly, the number of transactions only dipped slightly by around 10% and the rate of acquisitions remained strong.”
The reason being, buyers and investors know from their experiences with the last recession in 2008-10, that one of the fastest recovering sectors was healthcare. Buyers look at that history and realize if any industry is going to do well, it’s healthcare.
Looking at the second half of last year (2020) and quarter one of this year, transactions appear to be exceptionally strong for acquisitions.
In Conclusion: Get Your House in Order
Many see that it’s a seller’s market and believe they will get the highest value for their business — however, that’s not the case for everyone. It all comes back to the aforementioned fundamentals to best position yourself and your business when the time is right again in the future.
“You should always be running your business with the idea that someday you’re going to sell it,” said Roth. “If you have that mentality starting now, meaning you keep good financials, you make sure to have low customer concentration, you develop a solid team with a great growth story, etc., when a sell cycle like we’re in now comes back around you’ll be best positioned to move forward with selling your business.”
Topics covered in this article are based on a recent episode from the HealthCare Huddle Podcast — hosted by Mike Zervas and produced by Encompass Medical — simplifying the business of healthcare. Find show notes, and listen to the full episode HERE or using the player below.