by David Coit, DBA, CVA, CVGA, CM&AA, Director of Finance + Valuation

Volume 6 Issue 12, June 18, 2019

In this article, I recount a true story about a recent sale of a behavioral healthcare company (our client).

It was late in the summer of 2016. We were approached by the owners of the company at an industry conference, where they discretely mentioned they were interested in learning more about the possibility of selling their company. We agreed to meet at a private place to discuss the matter further.

At this meeting, the owners informed us that they started the company from the basement of one of their homes about 20 years prior. At the time of the meeting, the company was generating about $2.5 million in annual revenue. While they were proud of this accomplishment, they admitted feeling burned-out with the daily grind of running the company. Unfortunately, this showed in their annual revenue, which had declined from a high of $3 million a few years back.

We signed a non-disclosure agreement and then set out to gather more information about the company.

Company Valuation

After analyzing the company’s financial statements, company background, client and payor mix, and other company information, we provided the owners with an initial valuation of their company. They were not pleased. We explained the reasons for the low valuation as follows:

• Company was showing declining revenues and profits over the past three years.
• Profit and loss (P&L) statements included substantial personal expenses.
• Two of the owners' family members were on the payroll at above market salaries.
• Staff fully relied on the owners for daily directions (i.e., autocratic leadership).
• Financial statements had numerous accounting errors.
• Employee turnover was above the industry average.
• The company was experiencing a decline in market share.

In short, the owners had done nothing to prepare their company for sale.

Getting to Work Creating Value

We told the owners that if they wished to maximize the sale price of their company, they would need to roll up their sleeves and focus on building value for the next few years. They took our advice.

We worked with the owners for the next 18 months on each of the items highlighted earlier. The owners aggressively pursued new clients, reduced the amount of personal expenses in the P&L, brought all salaries and wages in line with industry averages, delegated responsibilities to senior managers, replaced their bookkeeper with an accounting manager recommended by their accountant, and took steps to decrease employee turnover.

By the early summer of 2018, the company was ready to go to market. Revenues and profits had grown steadily, the senior staff was running the day-to-day operations of the company, the financial statements were clean of accounting errors, and the owners were more focused on increasing market share and strategic thinking.

Efforts Paid Off

We went to market with a well-written, confidential information memorandum and a detailed financial analysis of the company’s past performance and projected future performance. The market response was fantastic. Within just a few weeks, we received four serious offers.

The owners and our team had numerous conference calls with potential buyers. Several of the potential buyers met the owners in person to become better acquainted. The owners quickly identified one buyer that stood out in meeting their financial and legacy goals. The owners and buyer signed a letter of intent and jumped into due diligence.

There were some bumps along the road through the due diligence process. Two key challenges that almost scuttled the sale were that the owners did not seek any help from their staff in gathering the information required during due diligence and the owners chose to use a family attorney to represent them during the sale process instead of a seasoned merger and acquisition attorney. We overcame these challenges and worked diligently with the owners and the buyer to get to the finish line. When all was said and done, the owners were pleased with the outcome of the sale, which occurred in early 2019.