As activity from mergers and acquisitions (M&A) heats up, long term and post-acute care providers need to be aware of demands during the M&A process to ensure a smooth and successful transaction.

 

It’s an incredible amount of detail work that needs to be completed in a very short period during the transaction courting period, whether it’s a divestiture or acquisition of another company. The documentation required by private equity firms spans tax, accounting, legal, compliance, regulatory, human resources, and environmental concerns, among others.

 

Smaller operations being considered for M&A often struggle to provide that documentation, particularly in a timely manner. It’s common to find that a company doesn’t follow U.S. generally accepted accounting principles (GAAP), probably hasn’t done an audit, and figures aren’t easily accessible or even prepared in some cases.

 

This organizing stage often delays the process because there simply aren’t enough hours in a day while staff focus on caring for residents.

Private equity firms have recognized the immense growth opportunity as the health care profession consolidates. While firms are now more comfortable with the profession in general and the different forces involved—the government, for example, with Medicare and Medicaid—they’re still cautious when it comes to risk and require a clear picture of an organization’s financial health.

In the accounting, tax, and financial world, companies often don’t do a deep dive to ascertain how and where they’re making money. It isn’t enough to know that the company is profitable by looking at numbers from month to month. It’s important to take data to the next level and understand what drives growth and cash flow and which segment, product, or service line is responsible for the profitable results. Companies often don’t realize their success is incumbent on one service line while other lines aren’t profitable.

Finally, long term and post-acute care providers often underestimate the value of good governance, which consists of an annual audit and tax compliance. All of these items add up to additional enterprise value.

It benefits companies being considered for M&A to be aware of, and prepared to provide, the unique documentation required during M&A. Companies should also be ready to discuss budget and a five-year projection prior to the due diligence process and meeting with a prospective buyer.

The key financial metrics to prepare are:

Prepare for a heavy level of scrutiny. The main types of due diligence a company should be prepared for cover all functional areas:

Often for smaller companies, the books and accounts are kept on a cash basis for simplicity. It’s beneficial to go beyond having tax returns prepared and transition books and records to GAAP because an acquirer will want to see those financial statements. Buyers, particularly private equity firms, will typically measure enterprise value on a GAAP basis. Consider hiring a certified public acounting firm to get financial statements in line with GAAP.

Sellers will need a village to get this process done in a timely manner—and that village consists of tax, accounting, and investment banking professionals.

Consult with a tax and accounting advisor before the acquisition process begins to give personnel enough time to prepare and organize. Having a tax advisor on the owner’s side is of benefit not only to help put forward the best tax structure in preparation for the transaction but also to help put the owner in a beneficial position if the buyer wants a different structure. In that scenario, the seller could potentially get compensated for a higher tax burden resulting from the proposed change, for example.

Finally, hire an experienced investment banker. Owners often don’t want to make this investment, but it’s rare to see a situation where investment bankers don’t pay for themselves when considering the value they provide. If the owner pays $1 million for an investment banker, for example, the banker might get $5 million more in enterprise value—and that’s a great return.

The best course of action is to get one’s financial house in order and have the required legal documents readily available in anticipation of an acquisition. Going through a transaction process is a huge distraction from day-to-day business. The goal is a short timeline to minimize distractions from the key business of providing care.