Paul Martin's View

Selling Your Company—Not a DIY Project

Paul Martin — Mon, 13 Feb 2012 13:00:43 +0000

I am not a Do it Yourselfer around the home although I’ve tried. A number of years ago I was fixing a window in my daughter’s room (she was two at the time) and pushed the window out of the guides, sending it tumbling to its death three floors down on our driveway! I assure you that I RARELY use bad language, but a four- letter word came out that day. And yes, my daughter repeated that word to her grandmother that afternoon!

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.

What Are Earn-Outs?

Paul Martin — Thu, 09 Feb 2012 18:35:34 +0000

Failure to agree on price is one of the most common reasons that M&A negotiations reach a stalemate. The buyer is not willing to commit additional guaranteed dollars to a deal and the seller believes the company is being under-valued. In these situations, there may be an alternative: an earn-out. An earn-out is an additional purchase price for a business that is paid based upon performance criteria that are agreed upon by the buyer and seller.

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.

Husbands & Wives and Other Business Partners

Paul Martin — Fri, 20 Jan 2012 02:33:38 +0000

According to the Small Business Administration, 90 percent of all U.S. small businesses are family owned. Of that, an estimated 14 percent or roughly 1.2 million businesses are husband and wife owned. With an average longevity of 24 years, these partnerships can survive and flourish.

An entrepreneurial partnership is your work marriage. Whether married CEOs or best friends from school CEOs, drawing clear lines between the business and personal relationship as well as understanding each other’s strengths and weaknesses breeds success.

Understanding Personality Types
Everyone has strengths and weaknesses, along with different communications styles. The key lies in truly understanding your and your partners’ behaviors and adjusting accordingly. Social scientists like Carl Jung and the mother/daughter team, Myers & Briggs have researched how people perceive the world and make decisions. Using tools that assess psychological and personality preferences to specific questions and situations, we can categorize people into anywhere from four to sixteen defined personality types.

When working with clients, we use a Disc Assessment to identify personality types and improve work productivity, teamwork, and communication. The assessments can be a real eye opener and help identify mismatches in “right talent, right fit.”

Clear Delineation of Responsibilities
About 30 percent of our clients are husband and wife business owners. Usually one is a treating therapist and the other is not. However the delineation between clinical and non-clinical is not enough of a differentiator when defining responsibility and roles. You both need to be very clear about the needs and goals of your business and divide your responsibilities based on strengths, talents and personality traits. Compromise and do not micro-manage the other.

Being married to your business partner can be one of the strongest leadership tools your company possesses. But if you are not in sync on the job, it will be easier for your staff to come between you. Above all keep work matters at work and don’t carry the business over into personal time.

Having a separate work space also helps many of our clients. Some of the more successful partnerships are when one partner works from home and one works in the office. We also see a slight advantage when both partners are therapists too. They are usually in agreement on their clinical product and just need to work on the business side.

I can’t say it often enough…having a written strategic plan is critical for so many reasons. For married partners it is especially important to bring in a third party facilitator to assist with your strategic planning process. It’s not too late to build your 2012 strategic plan!

Financial Implications for Married CEOs
Should you set up the business with a 50/50 ownership? 80/20? Should one spouse employ the other? You may want to take a look at each person’s credit rating to assist in your decision making. If one or the other has bad credit, fix it now. Looking down the road when your business is growing and you need to secure financing, the last thing you want is to be turned down for a loan.

Most banks require that anyone with 20% or more ownership in the business be included in the credit and underwriting portion of the loan request. If one partner has poor credit and one has good credit, make the latter the majority partner. If you’ve already established a 50/50 partnership you can make a revision to the business ownership structure. Just ask your financial consultant or attorney.

Having your financial house in order is critically important for any sale transaction.

Clinical Leadership: Three Steps to Success

Paul Martin — Tue, 13 Dec 2011 16:27:35 +0000

As your rehabilitation business grows it is critical that each facility be led by a clinician. You should expect a Clinical Director to take responsibility and accountability for not only the clinical aspects of the business but the operational and financial results of the clinic.

In order to ensure that a Clinical Director is successful, we recommend three critical steps:

1. Provide the Clinical Director with tools to measure performance – A Clinical 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 and budgets set. The expectation is that the Clinical Director will have accountability for the financial results.
2. Design incentive plans to reward strong performance – Clinicians are not motivated purely by financial rewards. That being said, clinicians who 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 incentive plan should be simple and easily calculated. We advocate rewarding top line performance, as it gives you greater control over the bottom line. We have created bottom line driven incentive plans, but have found them to be too complicated. They also can be the cause of disagreements over the financial controls of the company, tax strategies, etc.
3. 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 metrics, 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 at one time, including current and future Clinical Directors.

Once you have a few clinicians who have been trained to manage and direct a clinic, you have leveraged your knowledge and your growth potential is unlimited! For more information about developing clinical directors and building incentive plans, contact me at 856-914-1440 or visit Martin Healthcare Advisors.

ACOs: More Questions Than Answers

Paul Martin — Thu, 29 Sep 2011 14:44:57 +0000

I just came across a new survey by an independent firm to assess healthcare organizations’ (mostly hospitals) understanding and preparation for the development of Accountable Care Organizations (ACO.) The respondents were 200+ CEOs, COOs, CFO, CIO and other “C” types. Very, very smart people. Guess what? They don’t have it figured out either.

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.

Don’t Leave Money on the Table

Paul Martin — Tue, 13 Sep 2011 17:48:23 +0000

If you are not managing your rehabilitation business to budget, you may be leaving money on the table.

A budget planning process forces you to think through your whole business model. White it’s not written in stone, a budget acts as a benchmark for you to compare actual activity to projected activity. A monthly review of your Financial Budget and a weekly review of your Operations Budget quickly identities problems and allows you to nimbly make strategic adjustments.

Metrics That Matter the Most
In the rehabilitation business, there is a direct correlation between operations (productivity) and financial results. If you have never done a formal budget before and do not have a budgeting tool, start by creating an Operations Budget that defines your targets for volume indicators (referrals, visits, units and charges) and for performance metrics that matter the most: Cash/Visit, Visits/Referral and Visits/FTE/Day.

By using volume indicators and performance metrics you can build your Operations Budget based on prior history and current trends in your business. This should provide you with a starting point for your financial budget, as your operations drive your top line revenue. Then you can build your expense budget by analyzing historical expenses and salary trends.

Now look at your Operations and Financial Budgets side by side. Are these numbers in line with how your business should be performing operationally and financially? If you find disparity between the two budgets, you need to figure out why. This can be a very laborious process if you do not have a budgeting tool to show your operation metrics feed into your financial results.

Don’t Let a Buyer Lower Your Valuation Because You Do Not Have a Budget
Managing your business to a budget is the best way to make sure all of your years of hard work pay off in an eventual sale of your business. Here’s why. In an acquisition situation, buyers look for three years of financial statements in order to determine future performance. If all you can provide is an end-of-year accounting statement that only shows expenses and revenues, you’re doing yourself a great disservice.

These kind of accounting reports allow the buyer to make false assumptions about performance and assign a higher risk, thus lowering the price of your business.

On the other hand, if you can show operations and financial budgets, and how you manage performance to budget, the value of your business will increase because the guesswork, or risk, has been minimized.

We have developed a budgeting tool that takes the operations budget and pulls it into a financial report, basically automating a manual process. Our tool shows very quickly what profit will be achieved when certain operational targets are met. The result is business owners making decisions based on objective data and overall profit improvements of anywhere from 25-150%.

CMS Revalidation: What it Means to Physical Therapy Practices

Paul Martin — Fri, 09 Sep 2011 14:43:40 +0000

If you received a letter from The Centers for Medicare & Medicaid Services (CMS) requesting that you re-validate your Medicare enrollment, you’re not alone. More than 1.4 million healthcare professionals will be notified between August 2011 and March 23, 2013. The re-validation process is part of CMS’s massive anti-fraud effort. While re-validation has always been required of Medicare providers, it has not been widely enforced.

As a rehabilitation practice owner, here is what you need to know. Therapists who have enrolled since March 25, 2011 already went through the new screening criteria and will not have to be re-validated. Do not begin the re-enrollment process until your contractor notifies you. You will then have 60 days to re-certify your enrollment information.

“Start a file folder for everyone in your company now,” advises our colleague Nancy Beckley, MS, MBA, CHC, president of Nancy Beckley & Associates. “Gather everything from copies of licenses to social security numbers and 855 forms. This is especially critical for seasoned therapists who enrolled a long time ago and have not been updated.”

She adds that you may be subject to an unscheduled site visit at some point. “Physical therapy practices are in the moderate risk category and may be subject to a different screening process than the limited risk category most physicians fall into,” explains Nancy.

Regardless of category, Nancy says it’s best to do the enrollment on line after you receive your notification. She says that CMS prefers electronic filing over other methods.

Since 2007, Strike Force operations have charged more than 1,140 defendants who collectively falsely billed Medicare for more than $2.9 billion. The healthcare reform law requires a concerted effort to crackdown on fraud. We all have a vested interest in protecting the integrity of our healthcare system. Let’s do our part to make sure the system is there for those who need it.

Shadow Stock: Building the Program

Paul Martin — Thu, 11 Aug 2011 17:26:49 +0000

The most common way an employee earns shadow stock is through years of service and performance. For instance, a therapist should have three to five years of service at your practice and be a high performer.

Design an application that your employees can fill out if they’re interested in attaining shadow stock, so you have basic information about work history on file. In addition, set up a committee that approves new shadow stockholders. Members of this committee can be your board of advisors, business partners, pure equity owners and current shadow stockholders.

When you offer shares of shadow stock, base it on staff members’ positions. Here’s one way to break it down:
-Chief Financial Officer, 20 shares
-Multi-Clinic Manager, 15 shares
-Clinic manager, 10 shares
-Lead therapist, 7 shares
-Staff therapist, 5 shares

This type of gradual increase in stock offerings gives new employees a true career ladder. They can attain more stock and additional value in your practice as job responsibilities increase. This gives employees a legitimate incentive to help grow your business.

How much stock should you offer? The amount is predicated on how you value the stock. This is the tricky part. Stock can be valued in various ways, but the easiest method is the KISS “keep it simple stupid” principle of valuation methodology.

One potential methodology is to base stock on actual revenue growth, such as cash collections, from the time someone attains stock (basis year) until he or she leaves the practice and the stock is paid out (terminal year). Typical pay-out periods are somewhere in the range of three to five years.

Consider the following example. Practice revenue in a basis year–the year an employee receives shadow stock is $500,000. Practice revenue in a terminal year (the employee exits) is $750,000. Between those years, revenue increased $250,000. If you’ve issued a total of 115 shares, divide that number by $250,000, which yields a per share value of $2,174. If a therapist owns 15 shares of shadow stock, the total value is $32,610 (15 x $2,174).

Another option is to use the same growth methodology, but base it on a change in earnings or profits. However, this type of methodology may be confusing for staff members, since they may not understand all the details of financial statements.

In many cases, profit is difficult for employees to comprehend since you, as the majority owner, have a significant amount of control over that profit. Therefore, if you’re going to use this methodology, be sure that you maintain accurate profit and loss statements and have them reviewed by an accountant. Make sure you eliminate personal items that may be run through your practice for tax purposes.

Have your attorney thoroughly review the details of a shadow stock program and then create a small committee of key people in the practice to help you put the plan in place. The goal is to build unity and retain clinicians. If you give people a reason and incentive to stay, they won’t want to leave.

Shadow Stock Programs Attract and Retain Talent

Paul Martin — Wed, 10 Aug 2011 17:26:25 +0000

How can you retain key staff members and provide them with an opportunity to feel like stockholders in the company? Although some owners have been successful offering actual equity in a rehab practice, this option can be a recipe for disaster. As an alternative, you might consider a program based on shadow stock.
Shadow stock has several advantages to you as a practice owner over real stock or actual equity:

• Nonvoting stock. Shadow stock is nonvoting stock, which means that stockholders don’t have voting rights on your board of directors. This allows you to maintain control of the practice without risking minority shareholder disputes. These disputes can stop business growth and cause you significant legal dollars.

However, it is imperative that you allow shadow stockholders the opportunity to participate in major business discussions. Establish yourself as the leader who, after attaining input, will make the final decision.

• Cost of stock. It may be difficult for physical therapists who work in private practice to come up with the amount of capital necessary to buy real voting stock or equity in your practice. Shadow stock is typically offered at no cost. Instead, it’s based on years of service, commitment, and results attained while working at your practice.

• Valuation flexibility. Voting stock or true equity in a business usually holds value that’s based on a methodology outlined in a buy-sell agreement. A buy-sell agreement is a legal document that outlines how and when an owner may retire, reasons for retirement and; in most cases, a valuation methodology. This valuation methodology is based on fair market value, and it can be an expensive, tedious process. However, shadow stock can have valuation methodologies that are more flexible than real equity.

• Legal costs. Many owners have gone down the road and provided actual ownership or partnership opportunities for therapists. In many cases, this involves corporate shareholder agreements, multiple corporations, legal structures and legal fees.

However, the real expense comes when a minority shareholder enters into a dispute with the majority business owner. Based on these factors, a properly managed shadow stock program has significantly less risk and better odds of success.

Synergies in Acquisitions

Paul Martin — Tue, 26 Jul 2011 12:00:52 +0000

Synergy in business can be defined as the cooperative action of two or more entities for purposes of increased cash flow beyond what each entity could accomplish by itself. When considering your mergers and acquisition strategy, don’t let wishful thinking get in the way; realizing synergies without negatively impacting the business can be difficult to achieve. Have a plan for identifying and then realizing true profit building synergies.

Your primary objective in merging or acquiring another company is likely a desire to increase the value of your business. Look for synergistic opportunities in the areas of:

Marketing- Will you be expanding your service area, services offered, reducing marketing and advertising costs?

Purchasing- Will you be in a better negotiation position with your suppliers based on economies of scale?

Financial- Can you centralize accounting into one “corporate” system and reduce redundant expenses? Are there favorable intra-company financing opportunities or tax attribute utilization?

Administrative (HR and IT) -Can you consolidate shared services like human resources and information technology? Will you get better employee benefit rates with a larger employee population?

Achieving Synergy

In his book The Synergy Trap, author Mark Sirower lays out the “Cornerstones of Synergy” that must be in place for any likelihood of synergy. Not surprisingly the cornerstones themselves work synergistically. You can’t have one without the others.

Strategic Vision–This is where it all starts. Beginning with mission and values, your vision of what the combined companies will look like must be very clear, yet flexible enough to adapt to the unknown.

Operating Strategy–Until the companies are actually merged, the operating strategy will remain unimplemented. However, you must have a defined sense of how the combined companies will be more competitive and achieve more value in the marketplace.

Systems Integration–This is a real “nuts and bolts” consideration that must be explored extensively pre-transaction. There needs to be an extensive plan on how to integrate systems and people for a smooth transition. Generally, rehab business will focus on areas such as marketing, IT and HR issues.

Power and Culture–This cornerstone often takes a back seat to the legal and financial aspects of the deal, but is critically important. Actually the issue has less to do with whether the individual company cultures are the same or different than it does with whether changes needed to support a merger will clash with either culture. Unless staff can understand the real rewards and incentives of integration on a personal level, managing toward a synergistic culture will be an uphill climb.

Transactions That Create Synergy
From a purely academic view point, there are different types of business combinations that create synergies. Below are some quick definitions. Most transactions in the rehabilitation industry will fall into horizontal transactions, although we may see some vertical and conglomerate transactions in the ACO structure as part of Healthcare Reform.

Horizontal transactions–A horizontal transaction combines businesses within the same industry having the same product or service. These mergers strengthen market share, improve efficiencies and increase product/service quality.

Vertical Transactions–Non-competing companies who have different but related products merge under a vertical transaction. They may have been suppliers and customers of each other at one point and decide to combine to introduce new products into old and new markets.

Conglomerate Transactions–Companies who are completely unrelated to one another come together as a conglomerate transaction. They may seek synergies through sharing core competencies in areas of technology, marketing and distribution. Or they may be seeking to improve credit ratings or centralizing finance activities.