EDGEMONT CAPITAL BLOG

6 Considerations for Healthcare CEOs Contemplating a Deal

Legislative and regulatory changes such as MACRA and the Affordable Care Act have spurred a boom in healthcare consolidation. Investors seek companies that are growing quickly with further opportunities for future growth. Yet a variety of factors, including regulatory changes, third-party payers, and others can cause significant fluctuations in the perceived value of healthcare companies. Here are six best practices for healthcare entities anticipating a transaction.

Don’t let financial considerations such as payer dynamics undermine a transaction.
Billing amounts, how much a third-party payer pays, and similar factors can create issues. But most people building businesses don’t think about accounts receivable reserve policies or revenue recognition. Before a sale, the numbers need to reflect financial performance from a GAAP perspective. Errors here can cost a lot.

CEOs should seek help from industry specialists, or hire an in-house process manager. A full audit of the balance sheet can also help. Clear financials are vital. Excessive add-backs and adjustments can create an unclear picture that undermines a transaction.

Adopt a cautious approach to research and development.
Some business owners offer new services or pricing models in anticipation of a transaction. CEOs hope this will increase value. For acquirers, this practice can be a deterrent. Changes in the way a business operates, including what it offers consumers, are inherently risky. This needless risk offers virtually no benefits in advance of a transaction.

Businesses should focus on expanding the profitability and growth of the core business. For instance, IT businesses should avoid endeavors that commit the company to investing significant resources. A process that won’t immediately generate revenue may not be worth pursuing. Changing a strategy too much can actually move you away from something profitable, and into something that creates risk.

Engage in a mock compliance test.
Compliance is a gatekeeping mechanism. Buyers don’t just adjust values based on compliance. They may walk away from a deal altogether. Most buyers won’t work with a company that’s not 100% compliant.

It doesn’t matter whether you think you’re complying with documentation requests. Instead, you must meet or exceed the expectations of the buyer. Buyers who acquire companies that are not fully compliant expose their entire company to the new business’s shortcomings.

An external consultant can bring an unbiased perspective, evaluating your procedures and policies. Strengthening policies is often easier than expected, and can greatly increase the attractiveness of a business.

Seek out the right buyers.
Know what your buyers are looking for. Medical device company buyers, for instance, often seek late-stage, FDA-approved companies that generate significant EBITDA and revenue. Strategic acquirers tend to look less on where the company is, and more at how it fits the company’s strategic vision.

Medical device companies are in especially high demand, with valuations often hovering between 11-13x EBITDA.

Devise a strategy to thrive in a value-based economy.
Healthcare providers must focus on care quality, stay lengths, and having the right care and IT infrastructure to deliver in a complex and value-based economy. If you can’t provide details on how you contract with payers or how you’re positioned relative to your competition, it’s time to address these concerns well in advance of an exit. Healthcare is rapidly transitioning from fee-for-service to value-based care, so company positioning matters more than ever before.

Be prepared for changing regulatory climates.
Regulatory changes can affect everything about the operation of a healthcare business, including clinical protocols and reimbursement rates.

Timing matters here, and is a leading source of lost value. To maximize values, healthcare businesses must anticipate regulatory changes by reading the tea leaves of the current regulatory climate.

For example, the 2005 Deficit Reduction Act capped reimbursement for Medicare home oxygen at 36 months. Home respiratory businesses, which once generated as much as $10,000 per oxygen patient, saw values plummet to $1,000 per patient in just five years. That’s a 90% contraction based on something the industry couldn’t control—or necessarily predict.

CEOs must be mindful of the winds of change. Listen to chatter about your business, and pay attention to legislative changes. Don’t be afraid of looking at how your business performs, and how that performance may affect perceptions over time.