Volume 6 Issue 18, September 10, 2019
For most companies, initial growth typically originates from its core business. As a business continues to grow, it's important to diversify locations, services, and your funding sources.
This is a safety precaution more than almost anything else. If funding for one service is pulled or experiences cuts, the other funding source(s) can help you ride out the dip. You can shift resources and staff to the service line that will pay you while you wait to recover from the service line that declined.
When you go to market, your earnings before interest, tax, depreciation, and amortization (EBITDA) may not be very large. In fact, some people go to market with a negative EBITDA. Although this is not the most desirable approach to selling a business, it is possible to receive a decent offer when one can demonstrate that most of the profit has been invested in generating new business.
For example, I worked with a company that provided residential home supports. The business model was to rent 4-5-bedroom homes and provide private rooms to persons in need of support. Each time the company filled a home, it needed to spend money to open a new home and then fill it. There goes a lot of the profit.
However, it was clear to see that if the company stopped growing (i.e., investing in new homes), the profit would easily grow because the business was well-established. Better yet, when we went to market, the company had a waitlist of people in need of its services. It was easy to show prospective buyers the path to greater profits.
I have worked with many for-profit human service providers who continue to work in a "non-profit mentality" of not discussing finances with key employees, especially matters concerning profitability. I think we can all agree that we are not working in this field to get rich; rather, we are focused on doing amazing things for the people we support and earning a living in the process.
But as I have told many of these business leaders, profit is not a bad word. In fact, it's a vital issue when planning for the longevity and success of our organizations. Working towards a healthy profit margin will strengthen your position with banks (which can help keep you afloat through difficult financial periods) and new funding sources as well improve your organization's financial situation so that you can better weather cuts, dips, and growth cycles.
As an industry, we must begin to run our businesses like businesses, not charities, and discuss the critical issue of profitability with our staff and stakeholders. After all, without positive margins, we can't continue to provide services.
I recently read that mental health services are growing largely in part due to the increase in opioid use, destigmatizing of mental health and substance abuse, and parity legislation and implementation of healthcare reform. These factors probably did not factor into why most of you started your businesses. What they can now do for you is help sell your companies and services to those who aren't aware of these industry drivers.
As a business owner, it's important to know your industry, particularly where local, state, and federal agencies are allocating funding and resources. Buyers don't always have that particular insight. Highlighting matters such as upcoming rate increases and beneficial regulatory changes will help strengthen your market position.
Your essential employee bench is an important component of your business. Prospective buyers are looking for answers to many questions, such as: How valuable is your senior membership? How long have they been with the organization? What is their turnover rate? Will they stay following a sale?
We all know retention of direct care staff is an industry pain point, so most buyers will understand if you're keeping pace with the national average. However, if you can demonstrate that your senior team member turnover rate is lower than average or that a healthy percentage have stayed with your organization for a long time (thus demonstrating company loyalty), this can help add sizzle.
Most buyers are not interested in re-staffing your organization. Furthermore, they understand the value of trusted employees for continuing your company's mission.
I once asked a buyer (for a seller) if it was more important that a seller has high, growing revenue with slim-to-no EBITDA because of growth or slowed growth that showed a strong bottom line. The buyer's answer was very telling. He said it depended on the longevity of the new business. He appreciated that this seller was taking a lot of emergency placements and growing because of the ability to respond to demand quickly, but was the seller able to retain these placements and keep the business or were they more one-and-done services? Another way of looking at this: How long have you been providing services to the same people? Are the individuals you support loyal to the organization? Client (brand) allegiance is a quality that buyers want to see in acquisition targets.
Some services are short term in nature, thus making it more difficult to prove loyalty. In these situations, one way to demonstrate loyalty is to collect data on satisfaction with services and referrals made by those who have received services. If referrals tend to come from a certain school or doctor's office, how often are you receiving repeat referrals? Collecting information on where your business is coming from can be a valuable metric when striving to show loyalty.
As Co-Founder of LifeShare, a multi-state human services and healthcare organization, Rachel has a unique background of over 20 years of successful operational and executive experience, in addition to an MBA in Healthcare Management. She began her professional life as a home care provider, an experience that created the foundation for the innovative quality and success of LifeShare, while also changing her life. At LifeShare, she managed their Operations (Adult Day/Residential; Child Therapeutic Foster Care; HCBS; Child Therapeutic Day/Diversion Services, and Educational Programming), Finance, HR and Quality Assurance (facilitating COA accreditation and policy/procedure implementation). After selling LifeShare to Centene, Rachel remained during the transition of management and helped to provide outcome measurements and COA compliance reporting. At VERTESS she is a Managing Director providing M+A advisor and consultant services, specifically in the I/DD, behavioral health and related healthcare markets, where systems are rapidly evolving, and providers are striving to adapt strategically to diverse challenges.