Volume 8 Issue 12, July 27, 2021
The world of healthcare mergers and acquisitions (M&A) has experienced a significant rollercoaster these past two years, primarily due to the events of COVID-19. Before the pandemic locked down our communities, M&A, particularly in the health and human services space, was experiencing a significant increase in activity. This was caused by several factors. Among them: Existing organizations — or strategic buyers — were witnessing the benefits of growth through acquisition to compete with larger businesses and prepare for managed care, while private equity investors saw this field as one worth investing in. With an excess of cash reserves (i.e., "dry powder"), these private equity investors started spending.
When COVID-19 slammed the doors shut, and time seemed to stop, many deals followed suit. Most buyers hit pause to see what was going to happen to the industry and/or the markets. Some deals died altogether while others continued to transact. I personally witnessed all three of these scenarios. However, the deals that died typically experienced a temporary death, with the deals quickly recovering a few weeks later as buyers regained their confidence and saw the stability of health and human service organizations in the face of a pandemic. What we learned from these experiences: Even when the world stops, services are still needed. Some were postponed, like elective surgeries, regular therapies, and dentistry, but after a slight pause, all these services resumed, and with great urgency for many patients.
Now we have more than a year of learning under our belts and (hopefully) see a light at the end of the tunnel to a return to some semblance of normal living. So, how can you be sure that when you sell your company, you can get the non-COVID-19 value out of it? After all, the pandemic has undoubtedly affected your operations and bottom line, and likely not in a positive way.
This is where an experienced M&A advisor can help you secure the best price and terms for your company. Here are three of the key steps the M&A advisors at VERTESS take to create an appropriate valuation for our clients' businesses that takes into consideration the effects of COVID-19 on expenses and revenue.
1. Use historical and current year-to-date figures. One of the reasons that VERTESS collects several years of past and present income statements from our seller clients is that years of financials demonstrate trends and successes. By showing side-by-side comparisons of prior years, including that one likely dip in 2020 and then a gradual or quick recovery seen in a seller's 2021 numbers, we can easily explain the change in revenue impacted by the pandemic. By painting a picture with a seller's financial history, we can justify a price based on past performance and future projections, thus getting the seller a valuation that's not diminished by the pandemic.
2. Matching expenses with COVID-19 dollars. I have encountered some situations where Paycheck Protection Program (PPP) money or stimulus revenue is shown in a seller's revenue and buyers want to remove these dollars since PPP loans were a one-time revenue event. While this is technically true, what must be recognized is that many business owners spent their PPP money to retain employees and keep the lights on. If they hadn't received this money, they may not have continued to cover these expenses.
Similarly, many operators incurred extraneous expenses, such as overtime, hero pay, and retention bonuses, to ensure that services continued since many people were fearful of coming into work due to their risk of becoming infected. If COVID-19 revenues are to be removed, then the associated expenses must be as well.
This same exercise would need to happen for companies that profited from the shift in services. For example, if your organization provided goods or services during the pandemic that have not continued or won't continue when we exit the pandemic, then this will need to be recognized and accounted for as well since buyers will surely try to remove the revenue. What's critical here is to also identify and include the associated expenses rather than solely remove the revenue.
3. Capturing lost revenues. A seller's financial information shows the basic activity level of the organization over time. However, there are many sellers who projected growth that was stifled by COVID-19. Whether it be a waitlist for services, new homes opened, or unfilled purchase orders, owners and operators are keenly aware of the opportunities they lost when people stayed home or made significant changes to their purchasing plans. A skilled advisor can help you go through your financials and paint a picture of what "would have been" if COVID-19 had not impacted the business and how these projections point to a strong future for your organization.
Very few business owners had the potential for a global pandemic on their radar, and most did not know what to do when it hit — even with the best emergency preparedness. It is likely that mistakes were made and lessons were learned, but your organization's value should not suffer if you managed to effectively navigate the turbulent times. Some buyers will try to argue that they should pay for the current value of the business that factors in harm caused by the pandemic. However, with some upfront planning and collaboration with a skilled M&A advisor, you should be able to demonstrate how your business would be performing if COVID-19 had not happened and why your business remains strong despite the pandemic. With the right analysis and justifications, a strong business owner should be able to illustrate and get the true value for their company.
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.