You can minimize negative impact of COVID-19 on value of your business
While the trend of healthcare M&A and industry consolidation is expected to continue post-pandemic, practice owners now negotiating a sale and those who might consider a sale in the next 12 to 24 months may be concerned about how their current financial picture may affect the sales price they can negotiate.
Many physician practices have temporarily experienced reduced revenue or more limited cash flow, and consequently their quality-of-earnings will be affected as a result of the COVID-19 pandemic. If you are thinking about a selling your practice in the near future – and even if you ultimately decide not to sell – you will want to take steps to minimize the negative long-term impact of COVID-19 on the value of your business.
There are several ways to prepare a physician practice for a future sale, even while dealing with the immediate impact of COVID-19. This time can be an opportunity to improve financial record-keeping and recording, as well as to analyze key performance indicators (KPIs) that potential buyers are likely to consider. These efforts can help you ascertain the practice’s fair market value, and may increase that value, leading to a more favorable purchase offer.
Moreover, these analyses can benefit your practice even if you later decide not to sell. Looking at business KPIs and improving record keeping can provide better insight into the financial health of the practice and possibly help you identify areas for cost savings or additional revenue opportunities.
Improve financial record-keeping to prepare for healthcare M&A
How does your accounts receivable for the current quarter compare to last quarter and to the same time last year? What is your revenue projection for the next three months, and is it moving up or down? In what direction has net profit been moving for the past year? What is your projected 13-week cash flow?
The answers to these questions are important indicators of the health of your business; however, many physician practices do not keep the types of financial records that would facilitate answering them easily. You should be able to quickly pull a balance sheet; an accurate profit and loss statement (income statement); gross, operating and net margin reports over time; and accounts receivable and payable reports.
Potential buyers are likely to dig through your financial records to answer these questions (and more). It’s in your interest to do so first, and make sure you know the KPIs of your healthcare practice. Identify positive trends so that you can better understand what goes into your practice’s fair market value. Identify negative trends so that you can plan to address them.
Clean, consistent record-keeping may also help to increase the final selling price. Our experience has shown that consistency, transparency, pro forma adjustments, and other record-keeping preparations can significantly increase the actual price paid for a business.
Step 1: Consider switch to accrual accounting
There are multiple ways a practice can improve its financial record-keeping – and most involve going back through a certain time period and assessing transactions.
How far back should a potential seller go? Five years? Two years? To the beginning? What are the factors that can help a practice decide how far back to go?
The six steps below can improve your financial records, help you to understand the current health of your business and enable you to better plan for the future:
- Consider switching from cash-basis accounting to accrual-basis accounting. Many smaller physician practices use the cash-basis method of accounting. However, recognizing revenue only when it is collected and expenses only when paid makes it difficult to spot trends in areas such as patient volume, revenue collection, and profitability. The challenges of cash-basis accounting are exacerbated in healthcare because of the lag in time between the date of service and insurer reimbursement of a claim. Be aware that potential buyers will most likely convert your historical data to accrual-basis accounting for a more complete picture of your finances.
- Enhance consistency and transparency for historical information and projections. To ascertain whether revenue and profits are increasing, decreasing, or staying consistent, you must be able to compare “apples to apples.” Some of the more common places inconsistencies tend to appear include revenue recognition, monthly accruals and year-end adjustments made for tax reporting purposes. While it may not be possible to have total consistency between reporting periods, try to establish as much consistency as possible in historical data, and to establish consistent reporting guidelines going forward. Keep notes on the reasons for inconsistencies in order to quickly explain them to a potential buyer.
- Evaluate accruals and capitalizations through the lens of GAAP. Check to see if there are significant expenses that that are typically required to be accrued per Generally Accepted Accounting Principles (GAAP), such as writing off bad debt where necessary. Also check whether you have capitalized any amounts that can be capitalized under GAAP.
- Carefully calculate pro forma annual impact of acquisitions, expansions or performance improvement initiatives. If you recently acquired another practice, opened an additional office, began offering new services, signed a contract to be added to a new insurance network, or invested in a new claims processing system or other performance improvement initiative, calculate the expected pro forma annual impact of that change. Consider crafting a brief narrative with supporting evidence and clear logic for the projected impact; it may allow you to negotiate a more favorable sale, or may shorten the negotiating or due diligence period in a sale.
- Exclude personal and “related party” expenses as non-recurring expenses. If such expenses are paid through the practice, it can negatively impact reported earnings and the valuation a potential buyer would assign your practice. Prepare earnings reports with add-back adjustments for these non-recurring expenses and include detailed evidence to help a potential buyer accept the adjustments.
- Prepare and regularly update a 13-week cash flow model. This model is crucial to understanding your liquidity situation for the next quarter. (LINK TO PREVIOUS ELITE HEALTHCARE ARTICLE.)
Other records you may want to assess and improve
In addition to KPIs related to high-level profitability and cash flow, a potential buyer may evaluate other KPIs in your practice. Enhance your ability to argue for a higher valuation or sales price by assessing your records related to these KPIs, preparing to quickly and easily provide reports on them, and striving to make your reports and data as accurate, consistent and comparable as possible.
Create and analyze your reports on monthly, quarterly, and annual trends in KPIs such as:
- Total patient volume
- Monthly patient visits
- Monthly patient visits per provider
- Monthly procedures completed
- Monthly procedures per provider
- Monthly charges and receipts per provider
- Reimbursement rate
- Practice mix of private insurance, Medicare/Medicaid and self-pay
Lay a strong foundation by understanding where you stand
Of course, improving your record-keeping is not the only way to strengthen a physician practice as you prepare for a sale. You may also want to assess billing and coding practices, clinical processes, supply-chain decisions and a variety of other business and operational activities. However, before you take any of those actions, you need to know where the practice stands in terms of its finances and top KPIs. You cannot change what you cannot measure, and you cannot measure without good data collection, record keeping, and reporting.
Beyond arming you with actionable information you can use to improve your physician practice, strengthening record-keeping and reporting will help you to assess the fair market value of your practice, recognize any potential weaknesses, and negotiate with potential buyers for a more favorable outcome in healthcare M&A.
About the Authors
Ian Goldberger, CPA, is a business consulting services manager and a leader within the transaction advisory practice and the healthcare industry group at Kaufman Rossin, one of the top 100 CPA and advisory firms in the U.S. You can reach Ian at email@example.com.
Nikoleta Angelova is a Business Consulting Services Manager at Kaufman Rossin, one of the top 100 CPA and advisory firms in the U.S. You can reach Nikoleta at firstname.lastname@example.org.