Selling a healthcare company is a major decision that can be both rewarding and challenging. It involves careful preparation, attention to detail, and expert guidance to maximize the value of your business and ensure a smooth transition. Whether you're planning to exit in the short term or just starting to explore the process, laying the right groundwork is key to achieving a successful sale.
In this article, we will provide the 3 key steps to best prepare your healthcare company for sale. From organizing financial data to ensuring personnel and contracts are in order, these steps will help you navigate the process with confidence, increasing the likelihood of a successful outcome.
1. Organize Your Financials
One of the most critical aspects to prepare your healthcare company for sale is ensuring your financials are organized and accurate. Buyers will want a clear picture of your business's financial health, so having reliable and comprehensive financial documentation is crucial.
Income Statements (P&L), Balance Sheets, and a Quality of Earnings Review
When a buyer begins their financial analysis and review, they’ll typically request the last three years of income statements (P&Ls) and balance sheets as well as the year-to-date (YTD) of the current year. These financials are used to evaluate the revenue trends, cost structure, and overall financial performance of your business. Sellers that opt to engage in a sell-side Quality of Earnings (QoE), though not a strict requirement, can add significant credibility and reassure potential buyers that the financial statements provided convey an accurate representation of the business’ performance. Although it can be more costly up front, initial sell-side due diligence in the form of a QoE, is used to uncover anything that would be a material issue so that it can either be mitigated or resolved prior to a buyer’s review. Presenting a “clean” company to buyers and their lenders helps to keep a deal on the track.
Net Working Capital (NWC)
Understanding your Net Working Capital is another key step as you prepare your healthcare company for sale. NWC includes your current assets, such as inventory (if applicable), minus your current liabilities. Whether or not the sale includes working capital can significantly affect the deal structure. For example, having surplus inventory may increase the NWC, while reducing short-term debt can reduce your NWC position. Being able to calculate and explain your NWC will prepare you to address buyer inquiries and ensure the deal proceeds smoothly.
Adjusted EBITDA
Your company’s Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is the key metric that prospective buyers will use to assess the value of your business. Adjusted EBITDA allows buyers to get a clear picture of your business's cash flow by eliminating personal, non-recurring, or one-time expenses from the equation. Since this figure plays a major role in determining the valuation of your business, understanding your Adjusted EBITDA over the past 12 months (Trailing Twelve Months or TTM) will give you insight into your company’s value from the buyer’s perspective. As mentioned above, a sell side Quality of Earnings can aid in identifying and confidently presenting your Adjusted EBITDA to interested buyers.
*Buyers will also consider other factors when valuing a business, such as geography, the scale of your operations, the specific healthcare segment in which your business operates, payor or referral concentrations, and unique licensure or services, amongst other things.
2. Identify Key Personnel, Relationships, and Contracts
Selling a healthcare company involves much more than presenting a clean financial picture of the organization. Potential buyers want to know the operational details, including what management team runs the business, the relationships that power it, and the contracts that secure its long-term success. This is where a clinical advisor can play a crucial role in the due diligence process.
Personnel and Organizational Structure
Buyers are, in most cases, determined to retain the staff of the companies they acquire, especially key management figures. Defining your organizational structure is important to best communicate your business structure and effectiveness to prospective buyers. Create a comprehensive list of all employees and their roles. Also, consider which key players are likely to transition post-acquisition and who may exit along with you.
If you plan to exit the business immediately after the sale, you’ll need to identify potential leadership succession and prepare a strategy for managing employee transitions. However, it’s best to avoid disclosing the sale process to employees until the deal is nearly finalized to prevent unnecessary disruption or concern.
Review Contracts and Relationships
In healthcare, relationships with payors, patients, and providers are often essential to the business. Buyers will want to ensure these relationships and contracts are secure. That’s why it’s essential to review and summarize key contracts—whether with payors, vendors, or real estate leases—before entering the market. Identifying contracts with transferability provisions and assessing whether these terms could delay the transaction is an essential step to prepare your healthcare company for sale.
It’s also wise to organize all critical documents such as leases, insurance policies, healthcare audits, corporate documents, and licenses. Ensuring these are up-to-date, any relevant notifications or re-assignment provisions are understood, and that all documentation is easily accessible will streamline the due diligence process and build buyer confidence. Taking this step will also ensure a sell and their M&A attorney is aware of any potential regulatory hurdles that exist, so not to allow any unnecessary delays in an M&A process.
3. Establish the Market Value of Your Business
Understanding the current value of your healthcare company is essential when preparing for a sale. Too often, business owners have an inflated or inaccurate view of their company’s worth, which can lead to missed opportunities or prolonged sales processes.
High-Level Business Assessment
Before engaging with potential buyers, conduct a thorough assessment of both the strengths and weaknesses of your business. Buyers are sophisticated and will perform their own due diligence, so being upfront about any challenges or risks can help you establish trust early on. For example, are there regulatory hurdles you need to clear, or are there opportunities to diversify your revenue streams? Highlighting both your accomplishments and areas for improvement will show that you’re prepared, transparent, and realistic about the business.
This high-level assessment is a key part of preparing your healthcare company for sale and will help potential buyers quickly understand the value and potential of your business.
Understanding Market Value
Your healthcare company’s value is determined not just by its financials but also by the specific segment in which it operates. Healthcare M&A transactions often rely on comparable data, meaning recent sales in your industry provide a basis for valuation. By working with an intermediary who specializes in healthcare, you can better understand current market trends and the valuation multiples relevant to your business segment. This insight allows you to set realistic pricing expectations and helps you identify the right time to sell to maximize your company’s value.
Hiring an Intermediary
Navigating the sale process on your own can be overwhelming. An experienced healthcare intermediary can provide invaluable support, from positioning your business in the market to managing negotiations and ensuring the sale process goes smoothly. A skilled advisor will represent your best interests, handle complexities like the many facets of a due diligence process, and optimize the presentation of your company to potential buyers. Even if you don’t choose us as your representative, we strongly encourage you to find a trusted advisor who understands the intricacies of healthcare transactions and can assist in preparing your healthcare company for sale.
Taking the time to prepare your healthcare company for sale requires a strategic approach. By organizing your financials, streamlining personnel and contracts, and understanding your business's market value, you can maximize your chances of reaching your unique M&A goals. Following these steps will make the process smoother, ensure you’re well-prepared, and ultimately help you achieve the best possible outcome for your business.