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.

Analyze The Numbers

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.

Items To Prepare

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:
  • EBITDA. The metrics in a transaction focus on the economics of the business, in particular where the profit is coming from. Earnings before interest, taxes, depreciation, and amortization (EBITDA) serve as a proxy for cash flow from operation. A deep understanding of the recurring and sustainability of EBITDA and cash flows, which are often referred to as the quality of earnings, is required.
  • Profitability by segment. Separate profitability by each segment that the company operates in. This might include service line, procedure type, location, and customer or payer. In some cases, buyers will want to know the referral source—if it’s a hospital or doctor—and the volume of referrals. There’s a risk, for example, that a hospital may open its own service line and compromise the referral source. A good mix of referrals helps to spread the risk.
  • Accounts receivable. Prepare everything around accounts receivable, including days of sales outstanding and a zero balance analysis by payer class. Having the latter done periodically provides a closer look at collections over time, including potential shifts in payer mix.
  • Due diligence. It’s a trend to hire due diligence experts to perform a sell-side due diligence project on the company’s behalf if it is an owner-manager company contemplating a divestiture (selling). This process really prepares the company on the financial, accounting, and tax side by organizing what information is needed and what metrics will be analyzed. It arms the management team with answers to questions that might arise during the buy-side due diligence process, and ensures the organization is well prepared. In summary, it protects against erosion of enterprise value due to lack of preparedness.

Types Of Due Diligence

Prepare for a heavy level of scrutiny. The main types of due diligence a company should be prepared for cover all functional areas:
  • Legal. Includes any outstanding lawsuits and legal agreements.
  • Financial. Includes bank statements, recent financial statements, and key operating metrics.
  • Tax. Includes audits and several years of tax return information.
  • Employees. Includes surveys, questionnaires, or walkthroughs to understand the responsibilities of employees on a daily basis.
  • Regulatory compliance. Includes electronic data transfer that is compliant with the Health Information Portability and Accountability Act, disease and case management ICD-10 coding, health care coding compliance (health care Minimum Data Set reporting and resource utilization group coding compliance for billing purposes), provider contract management, and recovery audit contractor audit compliance, among other measures.
  • Other areas. Includes environmental and real estate if the company owns it.

Switch To Generally Accepted Accounting Principles

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.

Realistic Approach

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.
Luc ArsenaultLuc Arsenault, a partner and national practice leader of Transaction Services at Moss Adams, has practiced public accounting since 1992. He specializes in transaction due diligence ranging in deal size from several million to $20 billion. He can be reached at (415) 677-8287 or

Amy Runge

Amy Runge, a partner and national practice leader of the Long-Term Care Practice at
Moss Adams, has more than 23 years of accounting experience
and manages audits of continuing care retirement communities, skilled nursing centers, assisted living communities, and other health care organizations. She can be reached at (415) 677-8264 or