When working with clients interested in selling their healthcare businesses, our primary step is to assist in the assembly of an experienced transaction team. A key role on this team is a qualified and knowledgeable financial consultant, who can ensure that company financial records are up to date, accurate, and reliable. The financial performance of a business is the most important data utilized by buyers to determine their level of interest. Subsequently, a buyer’s valuation is predicated on this financial data. Having an experienced financial expert involved will ensure that the data presented is accurate and reliable, lessening the chances of any unexpected surprises throughout the process. Moreover, having organized and accurate financials will give the buyers confidence in their view of the company. We believe the most important aspect of a successful transaction is trust, leading with fully validated financial information begins to strengthen the trust between the parties.
In the following article, we share insights on the role of financial consultants from their involvement in a pre-sale financial assessment to their assistance in assembling and supplying vital information for due diligence.
Understanding the Role of Financial Support in Healthcare M&A
The addition of a third-party financial consultant to the transaction team is typically the second role we seek to fill (after the engagement of an M&A Advisor). Some organizations may already have a CFO, but we recommend firms who are experts in both transactions and healthcare. By bringing in a qualified financial expert early, a seller can best set themselves up for success through the lengthy M&A process.
A seller should expect the following from their financial consultant:
- Conducting a pre-sale financial assessment, referred to as Sell-side Quality of Earnings (QoE), to assess the accuracy of financial documentation (such as the Profit & Loss statements, Balance Sheets, Cash Flow statements, pro forma adjustments and Working Capital)
- Performing a financial operations review and developing charts as needed (i.e., revenue flows and margins, inventory management, and client base)
- Assist in completing a normalization analysis that eliminates non-recurring and one-time items to identify the Company’s Adjusted EBITDA
- Verifying compliance with all financial regulations, especially federal and state requirements
- Performing supplemental analyses that provide additional financial information deemed important to the sale (i.e., revenue recognition policies, sales by product or service offerings, projected cash flows, and financial ratios).
- Completing contract reviews, like debt and financing agreements
- Coordinating the seller's responses to financial information requests made by interested buyer/investor parties
- Responsiveness during buyer’s due diligence, and particularly in reviewing the buy-side QoE work papers.
Preparing Your Financial Records for a Smooth Sale Process
When you decide to sell your healthcare business, the financial statements that are supplied should be accurate and reliable, as this is the foundational data buyers utilize to present their opinion of value in an offer. Prospective investors will determine and present the perceived value of your business based on its historical financial performance, market position, growth potential, and other key financial factors. Your financial consultant and transaction team members should assist in generating, collecting, and preparing financial statements consistent with what buyers will request during a standard due diligence process. A seller risks a below-market valuation and a failed process if accurate financial data is not supplied from the start.
Clean Financial Statements are Key to Accurate Valuation and Reporting
Generally speaking, a seller will be asked to provide three years of historical financial statements, along with year-to-date (YTD) information, prior to a buyer submitting an offer on their business. The buyer will want to review, at minimum, the following financial documents:
- Income statements – Revenue less Expenses with Gross, Operating (EBIT) and Net Profit
- Balance sheets – Assets (Working Capital), Liabilities (Debt), and Share Holders Equity.
- Accounts Receivable Reports – Outstanding Collections and Aging
- Net Working Capital Calculations – Current Assets Less Current Liabilities to understand the financial needs of business.
A seller may need the assistance of a financial consultant to provide these reports in an acceptable format. All these reports will be requested by the buyer. Having a financial firm update and complete these reports will expedite the process and provide the buyer with the information they need to move forward.
By bringing in a qualified financial expert early, a seller can best set themselves up for success through the lengthy M&A process.
How a Financial Consultant Can Boost Buyer Confidence
Depending on the accuracy of the supplied financial statements, a buyer can react in many ways after their initial analysis. If there are significant discrepancies or concerning trends that were not initially present in the supplied financials, there is a risk the buyer may opt to pass on the opportunity, or should they already be in a formal due diligence process, terminate the LOI and the subsequently planned transaction. Other options do exist when unexpected surprises are found in financial statements, like a requested price reduction or another requested concession. Going into an M&A process with unreliable financials reduces the leverage a seller (and their M&A Advisor) has to negotiate favorable terms and most importantly, a valuation at the height of the market.
Additionally, once a buyer is engaged and a due diligence process begins, the first stage is typically a detailed financial review, most commonly referred to as a Quality of Earnings (QoE). The early involvement of a financial consultant and their own sell side analysis (i.e. QoE that was done prior to going to market) can greatly expedite a due diligence process. Buyers can begin their assessment confidently because a financial consultant has vouched for the accuracy of financial documentation. The seller’s financial expert can also be readily available for clarifying questions and additional financial data requests.
Lastly, a financial consultant on your M&A team can identify and correct errors and anomalies the buyer would discover later in the process. Some examples below of what due diligence can uncover show how an M&A advisor with a financial consultant on the team can troubleshoot and take corrective action before the deal is jeopardized.
- Recorded patient revenue does not match charges because deposits are recorded as revenue, leading to inaccurate profit figures.
- There is a lack of compliance with Generally Accepted Accounting Principles (GAAP) or the business is operating on cash-basis accounting.
- Questions remain about tax liabilities.
- Service or product line changes led to changes in financial reporting, making it difficult to compare yearly financial statements.
- Changes in payor reimbursement rates impacted EBITDA.
- Income from other sources is not properly booked (i.e. CARES act stimulus) showing inaccurate business performance.
- Overly aggressive add-backs to EBITDA leading to an overstated cash-flow.
Trusted Financial Consultants Make a Difference
The quality of the financial information compiled, assessed, and delivered to the buyer can determine whether the potential investor pursues an acquisition or loses interest entirely. An argument can be made that a seller's preliminary financial preparation is the most important element of the entire M&A process because the transaction will not occur without accurate financial statements and data. Inaccurate or incomplete financial information will not get passed a buyer's scrutiny.
Preparing ahead of time for a financial due diligence process is crucial to streamlining an M&A process. When you have decided to sell your business, the last thing you want is to experience numerous roadblocks that extend the timeline to close the deal or jeopardize it happening at all.
A financial consultant ensures that all parties can rely on the accuracy of the financial data, building confidence and trust between both sides. Without trust and a high level of certainty in the data, confidence can erode, and delays are sure to ensue in a sale process. The earlier you engage financial consultants in a planned M&A process, the better you position your business to achieve your M&A goal of a successful close.
M&A Healthcare Advisors are trusted advisors specializing in the sell-side representation of lower-middle market healthcare businesses. We assist in the identification of an expert team to ensure our clients have the greatest chance of reaching a successful outcome. For recommendations on qualified financial consultants or to learn how we can guide you through a successful M&A process, contact us today.