If we’re to believe the pundits, 2021 looks to be a rebound year for merger and acquisition activity in the healthcare industry. And not a moment too soon.
COVID-19 hit the Mergers & Acquisition business big time in 2020. According to Bain and Company, overall healthcare disclosed deal value decreased by a whopping 37% (-$339B) while the number of deals dropped by 9% (only 2,845 transactions). But with the pandemic nearing an end, M&A should get a much-needed shot in the arm. According to Bain, “significant opportunities exist for larger, well-run providers to acquire distressed assets. Additionally, telemedicine and virtual care capabilities might attract wider interest given the increased demand for this type of care following the pandemic.”
So if you’re a seller, how do you best prepare and maximize transaction value? After you sign an NDA, hire an investment banker, a good lawyer, and an advisor, how do you assure you’re getting top-dollar value for your practice? Here are a few things to consider.
Quality Compliance and Performance
This is where valuation begins.
A provider that lacks a concerted compliance effort runs the risk of audits and fines for not following the rules. Quality compliance exhibits itself to patients who benefit from the openness and accessibility of an organization. That translates to a passionate following and a stable, long-term business model. Investors put a premium on those providers who go beyond the norm and strive to employ best practices in both quality and compliance. But in the end, performance/cash flow is king and acquirers will prioritize performance and profitability as it makes for a less risky investment. A practice that fails to focus on the revenue cycle, (i.e. cash) will not command a premium price.
M&A activity is often prompted by the age of the practice partners. The success of businesses that have been around for a generation may be directly tied to the physicians and their reputations. This will affect deal value. Practices that show clinician age diversity are valued more. Note that this can lead to a difference in negotiating criteria. Older practitioners (that are closer to retirement) tend to prefer cash payouts with little concern over future or performance-based criteria. Younger partners (earlier in their careers) may find that long-term value is more important than immediate cash. This issue should be discussed before entering into negotiations.
Any deal will ultimately be realized on some correlation to cash flow so to the extent you focus on financial factors like revenue cycle workflows, inpatient validation, scheduling, and financial counseling, the more valuable your practice becomes. Be sure that E/M coding changes are fully updated in the EHR, maximizing reimbursements and profitability.
Culture is how your company runs today. The job satisfaction of your employees can correlate to patient satisfaction and this is not lost on an investor. Clearly defined protocols for establishing paygrades are important. Are they tied to credentials or continuing education, patient surveys, or some other metric? What policies are in place regarding work/life flexibility and promotion of a positive work environment? Culture factors should not be overlooked in maximizing practice value.
Failure to address these topics has the potential to create due diligence issues, slow the transaction process, and decrease deal value. Due diligence failure will result in either adjustment to the selling price or failure of the transaction altogether, so addressing these issues before the negotiating process even begins, is paramount.
An Assessment May Help
Akiro clients benefit from the due diligence checklist contained in the Healthcare Financial Management Association (HFMA) Consumerism Maturity Model. It’s a comprehensive assessment tool, providing an analysis of revenue cycle capabilities, price transparency, patient notes compliance, and consumerism best practices. If you’re preparing your organization for a transaction, using the HFMA model and employing a third party to score it, is a perfect way to identify opportunities and maximize value.
Give us a call and we’d be happy to weigh in.