We usually receive requests from practice owners to discuss when to know if they are ready to sell their behavioral health practices. We point out the following:
Compliance issues
It is imperative that the practice does not have any compliance issues with Medicaid or payers including significant claim denials, recent termination of contracts because of compliance issues, for example.
If any of these exist, they must be solved and allow time to make sure that the internal processes have stabilized and that these compliance issues have been solved. You might consider hiring experts in this field to assist in the process. Compliance issues with payers are a killer in a sale transaction.
Performance during the last few years
Buyers like to see strong recent financial performance. Buyers look at:
Growth rates of gross revenue: Buyers expect to see positive growth rates of gross revenue and client census during the last few years. Negative growth rates or large swings in those growth rates are a red flag.
Healthy margins: The practice should have healthy margins of EBITDA (EBITDA divided over gross revenues) in line with the industry. Also, those margins should be stable over time.
Employee Turnover
Buyers are interested in acquiring practices with low employee turnover and employees with time and development in the practice. High turnover ratios are a red flag for buyers.
Information, information, Information
Information systems must be robust. This means accurate and reliable financial statements (income statements and balance sheets) and bookkeeping. This also means having a robust clinical and operational information system to extract information at the visit level (charges and collections).
You should have basic information about your business readily available. This information is used to elaborate marketing documentation to present to potential buyers, and for the data room used in the audit of your business by the buyer (due diligence process). Make sure you have available at least the following information:
Financial information: Last five years of financial statements (profit & loss and balance sheet), monthly financial statements for the last three years, last five years of federal, state, and local tax returns, Information about federal tax examinations (completed or currently pending), payroll information, and bank statements and reconciliations.
Operational information: Client census, employee census, list of suppliers, billable hours per type of service, organizational chart, list of audits in progress (scheduled and completed).
Insurance information: copies of policies, historical loss data, and worker’s compensation.
Benefits: Information about benefit plans, employees’ manuals / policies, employment agreements, summaries of employee contributions, and 401k documents.
Legal: Organizational documents, copies of all contracts, licenses, and permits.
Case loads
Buyers during due diligence typically also analyze case loads per provider to make sure that the staff has a balanced caseload and that the ratios of provider to patients are within averages and recommended standards for the specific behavioral health discipline.
Appropriate classification of employees
One of the hot issues is certainly the appropriate classification of employees as W-2 employees and 1099 independent contractors. If the practice has a classification that is not in line with labor laws, there would be roadblocks during the sale process. The buyer will want to make sure that it would be indemnized for any challenge by labor authorities.
Growth opportunities
Buyers will evaluate if the Seller has taken advantage of growth opportunities in the past and that those are implicit in the historical gross revenue stream. Also, the owners should have clarity in terms of the potential growth initiatives for the near future.
Knowledge about the price of the practice
Before starting a sale process, the Seller should be knowledgeable about the potential price of the practice. The Seller expectations should be in line with the fair market value of the practice and the market conditions during the sale process. Thus, it is highly recommended to have your practice appraised by an experienced business valuator (see our services in this area).
With an appraisal available, the Seller can consult a tax advisor about the tax implications for owners by selling at the expected price, and the tax implications of selling stock versus selling assets (the two sale structures when selling a company).
The Seller’s plans after closing
The Seller should have clarity about those plans. Typically, buyers would like to see the seller stay in the Company after the closing of the sale and assist in business development (assisting the buyer to grow in the region where the practice operates) or assist on the clinical side of the business.
The Seller should know her/his strengths and skills. Typically, the Seller knows the growth potential of the practice, where to open new clinics, new potential services, and the like. If the Seller has skills and interest on this side of the business, those should clearly articulate this to your M&A (mergers and acquisitions) advisor and to the buyer. Sellers should stay and work where they can bring value added to the buyer after the closing of the sale.
Also, if you the Seller wants to exit the business, it is key to have a substitute already in place. This will also help to reduce the transition risk for the buyer. Thus, the Seller must hire or have developed leaders in the practice ready to substitute an operating Seller.
Be aware that if the Seller wants a cash out (sell, take your cash, and leave the business), most buyers will demand a non-compete clause in the purchase agreement. That means that you would not be able to work for a competitor or establish a similar business within a certain radius or within the state(s) where you operate. Thus, you should think about retiring or changing your occupation within the state where you live or move out of the state if you plan to continue working in the industry.
Understand what the sale process entails
You should understand what the sale process entails, what its phases are, how long it could last, the benefits of having an M&A advisor like Mergium Advisors, leading the process. Also, you should know the amount of work that you as an owner should put into the process and the costs associated with running the sale process.
Additional resources:
If you need assistance valuing your behavioral health practice, click here
If you need to read more about selling a pediatric therapy practice, click here
If you need to read more about selling a mental health practice, click here
If you need to read more about selling a business, read more
If interested in reading more articles and insights by Mergium, click here
If interested in knowing about our experience in selling / acquiring healthcare services companies, click here