The vast majority of business owners start thinking about exit planning less than a year before they want to leave, which may not necessarily be when the market is most accommodating to a profitable transaction. Ideally your exit plan should be sketched out as part of your long-term strategic plan when you first open the business. This kind of advanced planning will help you avoid pitfalls and take full advantage of market opportunities as they arise.

Top Five Mistakes
The top five mistakes we see can be avoided with a little advance planning and knowledge.

Not Knowing the Value of Your Business
One of the first things we do when working with a new client is a full business assessment and valuation.  After walking our clients through the actual market value of their company we’ll ask, “Does that number surprise you?” Invariably, the answer is yes. Many business owners operate on the mistaken belief that their companies are worth more than they actually are. Understanding value drivers will help you capitalize on unrealized or hidden value in the business as you move forward.

The DIY Approach to a Sale
This is a big one. Selling your company is not a “do it yourself” project. You don’t get to practice and you don’t get a second chance.  It has to be done right the first time or you will lose time and money.  You are an expert in healthcare services. A mergers & acquisitions advisor is an expert on merger & acquisition transactions. Buyers of companies are usually very experienced and savvy. They are looking for the best deal for them, not you. If you represent yourself, you are leaving money on the table guaranteed. Interview multiple advisors until you feel comfortable but do not go it alone. It almost never works.

We often receive calls from business owners after they have been approached by a single buyer and have started the sale process on their own. During the conversation we might uncover five or ten leverage points the seller can no longer use for a better deal structure, price and/or terms. If the business owner had entered the transaction with an advisor, he or she would have definitely been in a better position to negotiate a more favorable transaction.

Being Too Involved in Day to Day Operations
A business that is too dependent on you, the owner, creates too much risk in a transaction. Buyers are wary of companies where the owner IS the business. A valuable business has an effective leadership team in place with systems, processes and operations running independent of the owner.

Accessible and Reliable Books and Records
A clean set of books and records will pay big dividends in an acquisition of your business. We recommend that your financial statements should be compiled, reviewed, and possibly audited by a respectable accounting firm. In addition, it is imperative that you have operations data that is readily accessible and reliable.

Lack of Customer Diversity
In a healthcare services business, payers, providers and patients are your customers. A potential buyer will look carefully at your customer base. Prior to considering a sale, spend some time analyzing your records to ensure that no one physician groups represents more than 25% of your referrals and no one payer represents more than 40% of your mix.

The Wall Street Journal did an excellent piece on preparing to exit your business last month. They also identified emotional readiness and rushing to accept an offer as common errors business owners make. It’s a good read.

There is absolutely no downside to talking to one of our Advisors about what is happening in the M&A market. We are always willing to look at some basic data and provide you with valuable recommendations.

Provide Tools To Measure Performance
A Clinic Director must have key information on the operations of the business to be successful. We advocate establishing operating budgets that set realistic targets in key performance metric indicators, and compare those budgets to actual performance on a weekly basis. As the director matures, financial information should also be shared, budgets set, and an accountability of the director for the financial results.

Design Incentive Plans to Award Strong Performance
Clinicians are not motivated purely by financial rewards. That being said, clinicians that are migrating towards management tend to have a business mind; and, at some level, will be motivated by having the opportunity to earn more money. The plan should be simple and easily calculated. We advocate top line performance, as you have greater control over the bottom line. We have created bottom line driven incentive plans, but have found them to be too complicated as they can be the cause of disagreements over the financial controls of the company, tax strategies, etc.

Train Train Train
Very few clinicians have any training, background, or experience in management. Therefore, establish a training program that will provide your directors with training in leadership skills, management, operations and financial, customer service, compliance, and human resources. You can send your employees out to courses, but we suggest bringing someone in to provide training to multiple clinicians, including current and future Clinic Directors.

Once you have a few directors who have been trained to manage and direct a clinic, you have leveraged your knowledge and trade, and your growth potential is unlimited!

As consultants we have the advantage of being perceived as an impartial third party when we begin to work with clients. Upon getting to know the staff they will invariably “confide” in us about a problem employee. Usually the same person’s name comes up over and over. And usually the business owner is aware of the situation but hasn’t addressed it, mainly because they don’t know how.

The answer is team development. Use your top performers as a benchmark for improvement.  There are a number of organization development methods you can apply to bring your team together and continually strive for improved performance. One method we use with our Leadership Groups is called “High-Middle-Low” which ranks the overall company team.

Poor performance in an organization can unveil conditions in the business culture that allow it to happen. For example, do you have a flaw in your hiring process that does not screen for what we call “right talent, right fit?” Are you using a structured process for hiring, what we call the “three leg stool approach?” Do you use a valid, interviewing tool with appropriate open-ended questions? Do you use a behavioral assessment tool to obtain an objective view of a prospective hire?

Post-hire, are the right metrics in place to measure performance? For similar positions (such as staff therapists) we encourage sharing everyone’s metrics publicly in a grid so everyone can see each other’s productivity and perhaps trade tips and tricks. Is everyone incentivized for success?  Fostering a team approach ensures everyone works together toward a common goal.

Top performers want to work with other top performers. Yes, there may be times that you need to terminate employees. That’s what leaders do.  But if you have put in place a culture of performance and responsibility, the momentum will take your company to the top.

Two lessons learned. Hire a professional to do things that I have little experience with and never say anything in front of your children that you are not prepared for them to repeat!!! It ended up costing me more money, time and some ugly looks from my mother-in-law than if I had hired a professional in the first place.

The concept applies to the selling of a business. It’s not a DIY job. With my window project I now know what I did wrong and might be able to do it again with a little more practice. But, when selling your business you don’t get to practice and you don’t get a second chance. It has to be done right the first time or you will lose time and money.

We often receive calls from business owners after they have been approached by a single buyer and have started the sale process on their own. During the conversation we might uncover five or ten leverage points the seller can no longer use for a better deal structure, price and terms. If the business owner had entered the transaction with an advisor, he or she would have definitely been in a better position for negotiation.

There is never a charge to have a conversation about what’s happening in the M&A market. We are always willing to look at some basic data and provide you with valuable recommendations. Contact us today.

An earn-out can be an effective way to bridge the gap when the buyer and seller disagree on the price for a company. If the seller intends to be an integral part of the management of the business and will have some element of “control” over the operations, an earn-out can be an effective way to earn a higher purchase price for your business. However, if the buyer will quickly absorb the business and the owner will not be a part of the management team, very little, if any, earn-out dollars will be paid.

As with most M&A deal structuring, the details of an earn-out agreement can prove to be challenging. The parties must agree on the performance targets and specifically how they will be calculated. Typically revenue, or net operating income, measures earn-out performance. Utilizing revenue tends to be a cleaner method, as there are fewer discrepancies in the way that top line revenue is calculated. Measurement of bottom line, or net operating income, is more common, as the buyer wants the seller to drive profitability after the sale. However, the calculation of net operating income can be much more complicated, and therefore it is imperative to have a complete description in the legal documents that will describe this calculation.

There are other ways to structure earn-out performance targets, including annual referrals, visits, number of contracts gained and lost, gross revenue, or charges. Our experience is that the simpler the better, and that both parties need to be clear on what the roles will be post sale, and the specific performance criteria.

The key to success is that both parties walk away from the negotiating table feeling they have achieved their most important goals.

This particular survey had quite a bit of contradictory data. Although 90% of the respondents said they were in the ACO planning or development stages, only 15% said they were “very familiar” with ACOs. A full 45% hadn’t even committed dollars to the effort yet. Given ACOs start up costs have been estimated to be $1.8 million per ACO, I’m not surprised. Only about one third have even created a department or leadership role to develop an ACO.

I think it’s fair to say that hospitals have more resources at their disposal than you, the private practice owner. If they are not fully prepared for healthcare reform as proposed, why are you taking your eye off your business to worry about the unknown?

Think back to when “networks” were new. Everybody thought they had to jump into networks or they would no longer have access to patients. So private practice owners jumped into any network they could find. Did the advent of capitated and other types of networks really stop patients from coming to you? No.

I am not suggesting that you stick your head in the sand and stop following news about developing ACOs. I’m just saying we don’t yet know the true potential for opportunity for rehab practice owners. My suggestion is to get your business in order. Put your operations and financial budgets in place. Have a formal referral generation program in place. Commit your strategic plan to writing. You will be in a much better position to play in the new healthcare environment if you know exactly where you are now and where you would like to be in the future, reform or no reform.