Volume 7, Issue 23, November 24, 2020
I often receive calls from owners of human services companies who say something along the lines of, "I don't know what I don't know" concerning selling their company. What's important to understand is that it's okay not to know everything about selling a company. It's a complex process, which is why most successful sales involve a team working together toward a common goal.
With that said, it's definitely helpful for sellers to learn about the sales process so they can be more active, engaged, and effective participants in the process. This is why I encourage the sellers I work with to ask me any questions about the process and throughout the process. I also emphasize that there are no bad questions. I would rather sellers ask me every question than run the risk that they don't ask a question which turns out to be important to the sale or our working well together.
To help you gain a better understanding of the sales process, here are eight of the more common questions I am asked and answers that I hope make you feel more comfortable with pursuing a sale of your company.
A: M&A stands for mergers and acquisitions. These are ways that companies can come together. This can include two companies of similar size that decide to combine into a single organization through forming a new company or adopting one of the company's identity (merger). This can also be one company buying the other (acquisition).
A: There are multiple reasons to consider selling your company, merging, or acquiring another company. It could be that a business owner is looking to pass the reigns and retire or move onto their next big adventure. It could also be that the owner believes they have accomplished all that they can to grow the company and are looking for someone with more expertise or resources to take the company to the next level.
The reality is that size does matter in the human services world. Larger organizations have more resources, can weather difficult financial challenges, and often have a seat at the table during rate negotiations.
A: Anyone can try to sell or merge their company, even a non-profit entity. The health and human services industry is experiencing a surge of consolidation, mostly because of what was discussed in question #2. There are strategic buyers — or other provider agencies — looking to grow by acquisition, and there are financial buyers — usually private equity groups or small offices — looking for businesses to invest in and grow.
A: There is no way to determine an exact price. I usually start answering this question by saying an intellectual and/or developmental disability (I/DD) provider can estimate receiving about 40% of current revenue. This is just a quick guestimate since there are many factors considered as part of the valuation process. With the help of an advisor, several years of financials are used to determine the adjusted earnings before interest, depreciation, taxes, and amortization (EBITDA). Put more simply, we calculate what we believe the profit would be for a new owner.
Depending on the size of the company, location, strength, risks, diversified funding sources, and type of services, we multiply the adjusted EBITDA by an industry standard (i.e., what we're seeing similar companies being sold for). In I/DD services, this is usually between 3x and 6x EBITDA, but for applied behavioral analysis services, the figure can be as high as 10x to 12x. This gives us an idea of what we can expect for offers on a business. But, like real estate, it will ultimately be about finding the right buyer to pay the figure, so it's not an exact science.
A: A good advisor will help you navigate the entire M&A process until the deal is closed. This includes the following:
To learn more about the value of an M&A advisor, read my column from September.
A: When selling a company, there are various ways to structure the terms. A "recapitalization" is used to describe selling part of the business but retaining some ownership. This is accomplished by selling a percentage of the equity in a company while the owner keeps the rest. This is a great way to "cash in some of your chips" by getting money for your company while bringing on a partner that can help take it to the next level. We often see this achieved by financial investors who hope the seller will remain onboard and engaged to help further build the business. The infusion of cash and support that this buyer can bring will frequently create such growth that when the seller sells the remaining equity, the company is worth much more.
A: Most buyers are happy for you to stay on with the new company for a least a year or two to help ensure a smooth transition. If a speedy exit is needed, the buyer will usually ask that you are at least available by phone for the first six months to a year. Many buyers will offer an employment contract or consulting agreement during negotiations.
A: While there are horror stories of buyers dismantling companies and selling them off piece by piece, I stress that this is not the norm. Such a scenario is usually the product of a poor vetting process where the buyer and the seller did not discuss the future of the organization and did not share the same post-transaction vision. Buyers are usually invested in the company that has been built successfully and should be fully aware of the value that the employees and their mission and values have created. In fact, this is primarily what they are buying. A good advisor can help find a buyer that respects and aligns with the perspectives of the seller.
While we at VERTESS consider ourselves to be expert advisors of healthcare mergers and acquisitions (there's a reason we chose that as our company tagline), we also know that we don't always have all of the answers to questions about a transaction. Oftentimes, we might need to say that the answer to a question requires us to wait and see. However, with experience comes the ability to provide insight as to what we have seen occur during other transactions and how we expect a situation to play out.
Most sellers have one shot to get the sales process right. Fortunately, some of us have gone through it a few times and can lend some help.
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.