SELLING YOUR
BABY A P R AC T I C A L G U I D E TO T R A N S I T I O N I N G F RO M YO U R H E A LT H C A R E BU S I N E S S
by Tom Schramski
This work is licensed under the Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-nd/3.0/us or send a letter to: Creative Commons, 171 Second Street, Suite 300, San Francisco, CA 94105, USA
Selling Your Baby
Contents Acknowledgements Introduction Making a Thoughtful Choice Questions to Ask Yourself What’s Your Theme?
03 03 04
Making Your Baby Beautiful MYBB Checklist
05 06
Weighing Your Options Exercising Your Options With A Little Help From Your Friends Getting Representation
08 09 10 11
The Evolution of Your Sale The Price Of Value The Book Lessons From The Field
12 12 14 15
Leaving Home (Your Baby Is On Her Own)
17
Postscript: Surfing The New Normal
19
Resources
20
Bio
21
Selling Your Baby
Acknowledgements
I
have had the privilege of working with countless individuals with disabilities and with their families. I thank them for allowing me and my coworkers into their lives to work together to build better systems of care. Other entrepreneurs in our industry taught me much and helped me to succeed. As our company grew, we did our best to return the favor and support their success. Our dedicated employees worked hard, often under demanding conditions. In the end, they created a better community for all. I have done my best to remember that taxpayers have enabled me to provide services that have improved lives. I have endeavored to spend their money wisely, and I thank them for their trust. Today, I work with leaders of health care companies around the country. Most have stories similar to mine; some are included in this ebook. I have tremendous respect for you, my peers, and I look forward to sharing our stories and deepening our conversations for years to come. Great thanks and appreciation to Jack Eskenazi, Sr. and Jennifer Le and the team at American HealthCare Capital (www.americanhealthcarecapital.com) for their thoughtful review of the text and their support of this project. I also thank Karen and Ed Welles of Edge Content (www.edgecontent.net) for not only encouraging this effort but making it sing. They are skilled editors and wise critics. It’s a pleasure working with genuine friends. Finally, I would like to thank Christy, my beautiful wife; our children Paul, Sam, Daisia and Akilah and our wonderful family and friends. I’m a lucky man. Tom Schramski Tucson February 2012
Selling Your Baby
Introduction
I
n 1980 as I was beginning my doctoral studies at the University of Arizona, I became intrigued by an opportunity: starting a community-based business to serve people with severe disabilities. With $2,000 borrowed from my parents and a million dollars worth of naïveté, I partnered with a friend and we created a company that ultimately became Community Providers of Enrichment Services (CPES). We were in the midst of a profound social change. CPES supported children and adults with disabilities who were leaving state institutions and returning to their communities. There was little infrastructure in place to help our clients make that transition. On top of that, I had no business background, save what I had learned working parttime in my father’s gas station while growing up in southern Minnesota. We made a lot of mistakes during our early years in business, and we were always under the gun. We had to run fast—and profitably—or perish. But we also knew we were providing a vital service to a neglected constituency. That gave us faith that things would work out. And they did. My career at CPES lasted 24 years. During that time, we grew it to 1,000 employees and 600 clients. Annual revenues exceeded $25 million. Today, CPES is even more successful; it’s grown by 100% since my departure. This book is dedicated to the compassionate healthcare entrepreneurs, from independent pharmacists to owners of treatment centers, who understand that in order to continue their mission they must manage the bottom line. Meeting those two goals can be challenging. How This Ebook Will Help You While you may be focused on the immediate concern of selling your business, don’t forget the values, hard work, hard times and fun that brought you here. This ebook should serve as a trail guide and help you to:
Take an honest look at your intentions—and specific what-ifs—as you make your transition
Negotiate the mazes of options for sellers of healthcare businesses, including representation
Understand the basic transaction process, including the valuation/pricing and marketing of your business
Consider the personal impact of the transition from business ownership to your future life
Prepare for your transition as well as that of your business and others with ties to your company
Enhance your business’ value in advance of a transition
Selling Your Baby
Making a Thoughtful Choice
B
y the time you’ve made the decision to sell your healthcare business, you already have one foot out the door. Still, you have raised your business “baby” from birth and have forged a deep emotional tie to it. These conflicting feelings (the desire to sell and the deep personal attachment to your creation) can make the transition all the more difficult. It’s about so much more than dollars and cents. One productive and predictable phase of your life is ending, and another, yet to be defined, is about to begin. You may be selling your business, but just as momentous, you are in transition, on the cusp of a big decision. Think it through. Observe it from all angles. By doing so, you will forge a better deal and feel much better about your new direction. Questions to Ask Yourself Any sound business decision is multi-faceted, taking in both past experiences and future expectations. It considers the aims and interests of not just the principals but of those on the periphery. The prospect of selling my company roused a host of issues. Would this move benefit me? After 15 years in the same job, what would I do with the next phase of my life? And what about my employees? They needed to be treated well. After all, they had been the key to our success.
TOP 10 QUESTIONS TO ASK ABOUT PEOPLE AND PROFIT 1.
What are my personal financial needs, including retirement?
2.
How will this transition affect the plans and lives of other family members?
3.
Might my children want to stay on in the business after the sale?
4.
How important is it to have the “right buyer”?
5.
How critical is it to find a good cultural fit and do well by my employees?
6.
What will my life look like when I leave?
7.
What can I sell it for?
8.
How will our customers and funders respond to the transition?
9.
What is my company worth? How much will I take home after taxes?
10.
How important is my legacy?
Bottom line: Considering both profits and people in making your decision will yield a more creative and complete approach to the sale and ensure a smoother transition for all.
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Selling Your Baby
What’s Your Theme? When it comes to life, most of us don’t have one set plan in mind. Rather, each life has its themes, and those themes inform our plans. You may not know exactly what you want to do now, but the urge to change is palpable. Selling your business could free you to be more involved in charitable work or to start a different business or even a new career. Somewhere in that matrix of possibilities lies your theme. Within that theme, envision the various scenarios that might play out for you after the transition. If you’re planning to sell, even on relatively short notice, take the time to frame your questions through the lens of your imagined theme and scenarios. Do they fit together? Do they make sense? If you give this part of the process short shrift, issues will arise down the road. At every milestone along the way, ask yourself: Does this theme still make sense? Can I visualize myself in this scenario? Most owners in transition consider a mix of themes. My plan encompassed various goals: more time for family and friends, more travel and a safe landing for my employees. I also wanted to keep my hand in the business by building a new company and learning new professional skills.
Theme/Scenario is just like Vision/Strategy... Theme: Scenarios:
Simpler lifestyle, more time for family Work part-time, visit children and grandchildren, volunteer with an arts group, travel, move from old family home to an apartment
Theme: Scenarios:
Active lifestyle, more active socially Take a leadership role in community organizations and on boards, mentor younger businesses leaders, volunteer at church, advocacy
Theme: Scenarios:
New career, active lifestyle Establish a new consulting identity, learn new business skills, work as an interim CEO
Theme: Scenario:
Simpler life, focus on learning Develop musical skills, return to college, participate in a theater group, spend more time with partner
Theme: Scenario:
Do it again Starting or buying another business
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Selling Your Baby
Making Your Baby Beautiful
A
s you consider your options, you’ll need to prepare your business for a transition. Whether you are selling your business to another company, investors, or an Employee Stock Option Plan (ESOP) trust, you must do everything you can to ensure the business will run smoothly through the transition and beyond.
My Making Your Baby Beautiful Checklist is on the facing page. It’s designed to help you achieve the best outcome for you, your business, your employees and even the eventual buyer. Why consider the buyer at this stage when the business isn’t yet on the block? It’s critical to see any potential deal through the eyes of the buyer. Doing so will lend perspective on how the sales process will flow. Remember: buyers focus on realizing value. They must be able to see that yours can deliver that. As you begin preparations, you may realize, like others before you, that several areas of the business need improving. That was the case at my company, CPES. When I was preparing to sell it in 1995, I discovered we were wasting money in areas of the business that had nothing to do with our service quality. We poorly managed our overtime pay, transportation costs and some benefits. Why hadn’t I put out these fires years earlier? I was so focused on service quality and growth that I missed some key indicators that could have made my work easier and more profitable.
The overriding principle in approaching any transaction is honesty. The only way to find an honest buyer is to be an honest seller.
That review of operations prompted me to write our first real business plan ever. Up until that point, we had been flying by the seat of our pants, albeit spending money conservatively. I realized a bank would need a business plan to even entertain a deal. Ironically, I enjoyed the experience of a top-to-bottom review of the company, so much so that these reviews have become central to my current work as a consultant. The overriding principle in approaching any transaction is honesty. The only way to find an honest buyer is to be an honest seller. If you openly present your materials to all relevant parties you will increase your chances of finding the right buyer.
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Selling Your Baby
CHECKLIST: MAKING YOUR BABY BEAUTIFUL Take a strategic look at the business. What will it look like in two years or five years? If you don’t have a written plan for the next few years, note the highlights and basic financial projections.
Clean up your financials and include a basic monthly income statement and balance sheet. If you need outside help, get it now. Have ready at least three years of financial statements and year-to-date (YTD) financials.
Understand your cash position and any issues with receivables and payables. Always work to improve it by boosting collections or finding vendors with better pricing and terms.
Review all expenses in light of your transition. It may be a good time to wisely invest in systems that streamline operations. Invest to recoup. Buyers want a profitable turn-key operation. You want to get top dollar, but if the business isn’t primed for future growth, you won’t.
Avoid long-term obligations, including leases and other commitments with hidden or understated costs. Long-term leases can be significant obstacles to a sale now due to market uncertainties and poor economic visibility. Buyers will seek transactions that limit their potential downside.
Resolve outstanding legal issues ASAP. Buyers will not want to assume your liabilities or negotiate around them. They want to start with a clean slate.
Review customer relationships to ensure they are in good shape. Re-cultivating relationships can only be beneficial. Buyers value these relationships.
List all potential growth opportunities. Buyers want business growth to boost their return on investment (ROI). Clear growth prospects will increase the likelihood of a sale and even notch up the price you get.
Be clear about owner compensation issues. Do they receive salaries, draws or other financial incentives, such as company-funded vehicles? Buyers generally prefer simple, sensible compensation structures.
Assess your organizational structure for quality and effectiveness. This may not be the time for an overhaul, but it’s a good time to re-align and simplify responsibilities.
Shine up your offices and service/product sites. First impressions matter; buyers prefer owners who take pride in their operation.
Organize your records so you have handy copies of all contracts, leases, insurance policies, tax returns, corporate documents, titles and licenses. Buyers like smart, tidy sellers.
Review the transferability provision of all contracts, especially those with major payers. Contract requirements are critical to buyers. You want to eliminate any possible factor that could delay or scuttle a sale.
Consider trade-marking any intellectual property, such as a customized billing program. You might retain such assets or sell them in a separate transaction.
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Selling Your Baby Putting Off the Prep Work Why wouldn’t you prepare for a transaction? Owners often deny they’re in transition. They say they want to sell, but they may resist letting go. A thorough review of the business forces you to confront your mistakes and weaknesses. Doing so can improve your chances of making a successful transition. On the other hand, putting off a review usually invites complexity, self-doubt and the likelihood you won’t fetch top dollar.
THE REAL WORLD: PREPARING YOURSELF
“W
hen we first thought about selling our DD (developmental disabilities) company, we were in trouble because of budget cuts. We decided to reposition ourselves by reducing certain services where the reimbursement was too low. It was difficult to make those changes, but it was the only way to survive. “It took us more than a year to become profitable again and another year before we could sell our company. Improving our cash flow was the hardest part. I still can’t read a cash flow statement.”
“W
hen I began thinking about selling, our financial records were pretty disorganized. I hired a new CPA, and she told me we were lucky that we only owed some back taxes. We worked out a payment plan and she helped us develop financials I could actually understand! The big change: we converted our accounting to accrual and kept our taxes on a cash basis.”
“T
o be honest, I didn’t care about the financial part and left it to my wife, who is good with numbers. After the kids left home we considered selling our two assisted-living facilities and keep our in-home care business for a few more years “Business was quite profitable, but the hardest part was trying to be fair with our top two managers who had been with us for years. They didn’t know we were planning to sell the facilities initially, but then we decided to see if they would be interested in buying them. One was and the other wasn’t, but it eventually worked out. In the process, both of them gave us good ideas about how to improve our business model.”
“O
ut of the blue we decided to move so I decided to try to sell my therapy practice at the last moment. I had lousy financial records and so I just closed shop.”
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Selling Your Baby
Weighing Your Options
A
n option is a possibility that, once acted upon, becomes real. A viable option is one that can withstand the rigors of the real world. As you consider your transition options you’ll need to test them under the most conservative (“worst case”) scenarios by scrutinizing all the what-ifs that could narrow, limit or reshape them. Think of every possibility as you prepare your company. “What happens if I put my business on the market and no buyers show up? “What if we can’t find financing for the transaction? “What if the offers come much lower than expected? And don’t stop asking yourself: Do they still hold up?
When to Sell There are favorable times—and less favorable times—to sell your business. Every business has its plusses and minuses. Some things are going your way; others clearly aren’t. Perhaps your business is teetering on the edge and options are few. That’s when you show patience, keep the business running and prepare for better days. Or maybe you’re accelerating toward greater success and options abound. Timing has some value. Still, there are many ways to place your business in the best position to enhance its value.
IN GOOD TIMES AND IN BAD... It’s generally a favorable time to sell a business when:
It’s often more difficult to sell a business when:
You have a strong history of profitability You have a good business location Your cash flow is great You have excellent management and staff Your customers love you You have a strong market position
You’re losing money The regulatory environment is tough You have strong competitors Your market has low barriers to entry Revenues are declining Your business model is outdated
Benchmark Your Pros and Cons Given the scenarios above, list your pros and cons. How does your company stack up? How can you keep the pros intact? How do I fix the cons? Then return to the Making Your Baby Beautiful Checklist to measure— and ultimately improve—performance in the various parts of your organization. This exercise will clarify what really needs fixing and what doesn’t. It’ll also increase your viable options.
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Selling Your Baby Exercising Your Options Depending on your circumstances and goals, you will emerge with options once it comes time to sell. Here are some likely scenarios:
Sell to another business and leave in the near future. You’ve decided to extricate yourself
from the business. Not so fast. Understand that most buyers will want you to play a consulting role during the transition to ensure stability. This contingency is often missing from the sales contract. Make sure you discuss it fully and put it in writing. Sell to another business and stay on. You want to give up ownership to free yourself of owner
responsibilities. Maybe you enjoy more creative aspects of the business or want to assume another role. Private equity firms and other investors often require sellers to stay and help grow the business in return for a financial incentive (e.g. an earn-out). This happens in many ESOP transactions, where an owner remains after selling part of the company to a trust for the employee-owners. Sell to your employees. You want to reward them with an opportunity to own the company—
and you also want to extract your equity in the company. This is the classic ESOP-type strategy that provides options for owners who don’t have a ready buyer and need to keep running the business to realize its full value. For wisdom on this option, visit the website of the National Center for Employee Ownership (www.nceo.org) and see the book Equity: Why Employee Ownership is Good for Business. (See also the Resources page in this ebook.) A related option: selling to a group of loyal managers. This plan may entail owner involvement in the business and some owner financing. Sell to a family member. You’ve decided to turn the business over to a family member and even-
tually leave. This option typically involves a transfer of equity with some payment to the family owner (from parent to child) leveraged by cash flow from the business. These can often be tricky deals. Imagine being a father and owner one day and a seller and employee the next! You’ll need to speak frankly with family members and develop a solid contract. Remember: there are good reasons why most family businesses fail to survive more than three generations. Sell to a partner. Your partner wants to buy your stake in the business or has another investor
who wants to buy in. In this situation, much like an ESOP, the true market value of the business may be hard to determine. Often, a third party is needed for the valuation and for other financing matters. Note that a buying partner will often buy at a below-market rate given the lack of additional advisory fees. Smart business partners address this potential situation when they first form their partnership.
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Selling Your Baby With a Little Help from Your Friends While there are many ways to sell a business, the process itself is fairly straightforward. There is a transition of ownership. The seller expects to receive some payment or benefit based on the estimated value of the business. The owner expects to pay a fair price based on the future earnings of the business. He also often expects the seller to stay on for a period of time in a defined role to ease the transition. In 1995 I sold CPES, a company that eventually grew to 1,000 employees and $25 million in annual revenues. My decision to sell to an ESOP was relatively clear-cut. I had wanted to reward my employees for their loyalty and hard work, redeem some of my equity to pay debts and college tuitions and start planning for retirement. To meet these objectives I was required by my bank to sign an employment agreement stating that I would remain with the company as CEO for several years until the loan debt was retired. These details—where business and personal goals intersect—are key considerations. I couldn’t have left CPES immediately after the ESOP deal even if I had wanted to. It just wasn’t an option. As you narrow your options, a funny thing happens: It gets easier to be confused about your motives. Am I just selling out? Am I abandoning the people who played a large role in my success? Sometimes, owners even feel they are “hiding” their true intentions from employees and friends. This is a natural aspect of the anticipated transition. Getting Representation While owners can and do sell their businesses without representation, that route can be challenging. Remember, you are selling your baby. This is no simple, emotionless, financial deal. There are many details to hash out—and you must keep running the business. Often an objective, professional third party can step in and add value. Representation usually takes one of these forms: Professional Service Consultants. This
could be your attorney or CPA or another similar specialist. If you’re contemplating a complex ESOP-type transaction you’ll need their support, and it’ll be expensive. Ultimately, you’ll rely heavily on an independent attorney and/or CPS to help you fully understand the legal and tax implications of your proposed transaction. Business Brokers. These are commission-
based representatives who operate much like
WAIT, WHY AM I SELLING? As you narrow your options, a funny thing happens: It gets easier to be confused about your motives. Am I just selling out? Am I abandoning the people who helped me succeed? Sometimes, owners even feel they’re “hiding” their true intentions from employees and friends. This is a only natural. My advice to the hundreds of sellers I’ve counseled has always been the same: Talk confidentially to a few people you trust about your intentions. Stay focused on your options, scenarios and big goals. Stay flexible, so you can respond to whatever happens. Remember, only you can see the situation through your eyes. It’ll never be possible to please everyone.
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Selling Your Baby real estate salespeople with binding seller contracts. In fact many are, as business broker are often required by law to have a real estate license. Look for brokers that specialize in healthcare businesses. In this market, most transactions are valued below $500,000 and involve first-time buyers, though there are exceptions, especially with experienced, specialized brokers. Brokers will market your company and develop contracts. Mergers & Acquisitions (M&A) Advisors. These professionals are usually commission-based and often
focus on a particular industry. Some cover healthcare or sub-specialize in markets such as in-home care. The companies they represent range from less than $1 million in revenue to more than $100 million. In addition to an attorney or CPA, an M&A advisor offers another layer of expertise, while advocating for the seller. Buyers working with these advisors tend to be financially sophisticated and pre-qualified for acquisitions. Investment Bankers. They are often involved in large transactions valued as high as $1 billion or more.
The sales process is conducted much like a slow auction, with multiple offers and complex negotiations.
THE REAL WORLD: OPTIONS
“W
“O
“W
“I asked if he thought other employees might be interested, so we opened it up for discussion. After some research, I pursued the ESOP option and, since I wasn’t in a hurry, we began with a sale of 30%. It was a little expensive, but everyone understood that because we shared the financials. Our business continued to grow until we sold the rest of it several years later.”
e had several related business services, including home infusion, pharmacy, and home medical equipment. Neither of our kids wanted to work in the business, so it was an easy choice to sell it with a broker that sold businesses like ours.”
e listed our specialized pediatric care company with a national M & A firm because we figured there was a limited market in our area, and we had no clue about how to value or market it.”
ne of my managers learned I was thinking about selling the business and asked if I would help him buy it. We looked at his resources and what our clinic was probably worth and there was a pretty big gap.
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Selling Your Baby
The Evolution of Your Sale Most sales have clear steps you’ll need to follow. Sign a contract/fee agreement with your representative. This contract establishes the “ground rules”
for your agreement with your representative. It should be reviewed by an independent attorney, with attention to all fees and the exclusivity of the agreement Get a business valuation. You need to determine a value for the purposes of pricing your listing (see The
Price of Value), based on several industry-specific and market-related factors. Market your business. Bring your business to the attention of potential buyers by sharing critical informa-
tion with qualified buyers. They will need to complete a confidentiality agreement (CA) or a nondisclosure agreement (NDA) before they gain access to the information (see The Book).
THE PRICE OF VALUE When owners begin to consider the value of their business, they need to know the answers to these questions: What am I selling? What will the market bear? How do I calculate my sweat equity as part of the valuation? Will I receive the entire sale price at closing? Will some of the proceeds be held back or financed by me? Are future opportunities and past investments fully considered in the sale price? Will I have any obligations after the sale? Is there any value in agreeing not to compete with the new owner?
When a potential buyer is looking at your company, the questions are similar, but posed, of course, from a different perspective: What am I buying? Are past earnings a reliable guide to future prospects? What’s the lowest price I can pay without scuttling the transaction? How stable is management? How long will the seller be available to assist in the transition?
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Selling Your Baby How stable is the market, including any public funding, going forward? How long will it take me to recover my investment? How much risk can I get the seller to assume?
Naturally, sellers and buyers will look at the same documents and come up with different conclusions. Why? You want to get the highest price, and the buyer wants to get the lowest. It’s been going on for centuries! Business valuations provide common ground because they’re based on generally agreed upon principles. There are many ways to value a healthcare business. For buyers of healthcare businesses, some of the most significant issues in a typical middle-market transaction include: Cash flow and profitability of the business, usually estimated with a calculation of earnings before interest,
taxes, depreciation and amortization (EBITDA), as well as other adjustments unique to the owner in addition to salary (adjusted EBITDA) Market segment and future opportunities Size of the business (EBITDA and annual revenue) “Fit” with buyer’s strategy and organizational structure
Beyond Price The valuation is ultimately translated into pricing, which is an attempt to estimate a reasonable market value, so the business may be sold at an amount that is acceptable to both parties. A sales price is important but should always be viewed in a larger strategic context. Price and value correspond, but they are not necessarily the same. Beyond price, there are other issues to be considered in a contract. For example, maybe only part of the business will be sold. Or perhaps the seller assumes an employment contract with incentives for revenue growth. The deal might include a carry-back for part of the sales price with regular principal plus interest installments made during the payment period, like a typical loan. The contract could be structured to give the seller substantial tax benefits. (Note: It’s critical to understand the implications of an asset vs. a stock purchase.) The seller typically keeps the available cash and receivables at closing, while remaining responsible for all payables and other debt. Some buyers may want to keep the available cash in the business to lessen their cash commitment, which creates a de facto discount of the seller’s sales price. Just about everything is negotiable and should be addressed in writing.
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Selling Your Baby
THE BOOK Professional third party representatives often refer to the collection of information about the seller’s business as the book (also: “seller’s memorandum”). The book typically includes confidential financial and other information, so it’s released only to potential buyers after a CA or NDA has been signed. In some cases, the advisor or broker completes a buyer background check or attempts to pre-qualify the potential buyer, much as a bank pre-qualifies a home buyer for a mortgage. Assembling the book is often challenging for sellers as it requires summarizing and updating diverse information to give buyers a comprehensive picture, past and present, of a going business. The book often includes the following: Two or three years of financial results including YTD financials (income statement and balance sheet) Any current business or strategic plans, including financial projections A segmenting of services or products by revenue source or location A current organizational chart A list of all contracts and their lengths A list of all service locations Historical information on the business Copies of brochures, advertisements and other marketing materials The total number of employees, both full-time and part-time and any independent contractors The total number of customers or clients/patients by revenue source and location, if applicable All real estate owned by the seller, and if it is to be included in a transaction Any new services/products or other positive market differentiators Maps of the service territory and related market demographics
Once the book has been compiled, the seller is ready to solicit buyers. This process commonly unfolds as follows: Discussions and negotiations. There is discussion, and possible negotiation, based on the buyer’s initial review of your company’s financials, operations and other market-related information. The offer review. Typically an offer with terms is presented in a letter or in a more formal Letter of Intent (LOI), signed by both parties. The LOI requires the seller to take the business off the market while the parties move forward in “good faith” to complete the sale. The due diligence review. The prospective buyer asks detailed questions about the business and reviews all areas of operation while the sales contract is being developed. Often this entails an on-site inspection of the facility and records, with an evaluation of the data completed shortly thereafter. In some cases this may lead to additional negotiation based on what is discovered. 14
Selling Your Baby The contract agreement. A sales contract (also: “Definitive Agreement” or similar term) is developed with one party taking the lead, but all parties participating in the writing and related negotiations. One key issue is whether the sale will be a stock or asset purchase, with the attendant tax and contract transferability issues. The closing. The transaction is completed. The seller receives payment and the buyer takes ownership of the business. From start to finish, the process can take 90 days or longer, based on numerous factors. Lessons From The Field I use the word “evolution” when I talk about this process because every transaction is different, unfolding in its own way. Some transactions move quickly, but most do not. The fewer your perceived options, the more likely you are to make a decision that will conflict with your long-term goals. The more options you have, the more patient you can afford to be and increase your chances of making a successful sale. While it’s impossible to identify every “what if” in a transaction, you can maintain some equilibrium by focusing on the basics. For example, what position do I want to be in after the transaction? When do I want to exit the business? Do I need help making this sale, or will I need representation? Below are some real-world scenarios. In each case, the transactions, like life itself, took unexpected turns. You should be prepared for no less: Mary, 57, listed her substance-abuse clinic with an experienced business broker. Her goal was to work parttime after the sale. After putting a conservative value on the business, she believed she would have enough money for a healthy retirement. After six months she received an acceptable offer in the form of an LOI. Working with a first-time buyer slowed the process. Negotiations and due diligence dragged on for months. Then, just before closing, the buyer asked for an additional $100,000 reduction in the price and a one year carry-back of $125,000 with interest. Mary agreed to lower the price by $35,000, but she didn’t accept the carry-back. The buyer then agreed to her terms and the transaction closed a year after the business was listed. Steve and Juanita, planned to sell their durable-medical-equipment (DME) business and move across the country to care for elderly parents. Given that the business had always been profitable and faced little competition, they decided to sell it themselves. They received many calls and emails, but mostly from brokers who wanted to list the business. Fielding these inquiries devoured their time over the next month. Then Steve and Juanita’s manager approached them about buying the business. The manager’s family had raised 67% of the purchase price and asked the owners to carry the difference, in the form of a loan, for 18 months. With the help of their attorneys and CPAs, the parties quickly reached an agreement, owing to the manager’s intimate knowledge of the business. The transaction closed within 100 days of the listing, and all payments were made on time after the close.
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Selling Your Baby Esperanza and her dedicated employees built a multimillion dollar Medicare staffing and in-home care business over the course of 20 years. She explored her options and decided to take the ESOP route. After discussions with her employees she began working with a local ESOP attorney. They created a partial ESOP ownership (40%); Esperanza retained the balance. Today, two years later, Esperanza remains CEO and managing owner. A succession plan is in place, and she will sell the remaining 60% to the ESOP in about three years. She is already in a position to spend more time with her grandchildren. Mark and Andy were partners in a private-duty home-care business, while Mark also worked part-time as a physical therapist. Eventually Mark decided he wanted to be bought out of his 50% stake, so he could focus on his therapy business. During discussions, Andy suggested that Mark’s share was worth less than what Mark believed was fair. A legal battle ensued, creating additional animosity. By the time the dispute was resolved, company revenue had dropped precipitously. The pair tried unsuccessfully to sell and ended up closing shop. Quincy and Latisha had begun their developmental disabilities services when they were in college and couldn’t find good care for Latisha’s brother who had been diagnosed with autism. For 12 years they provided early intervention services for people with autism and other services for people with disabilities. While they enjoyed their work, they disliked the responsibility of ownership. They decided to sell the business using an M & A advisor. After listing, they received many calls but wanted desperately to find a buyer who shared their vision. One day they were introduced to a well-regarded company that was expanding regionally. They entered negotiations and received a proposed contract that contained a “hold back” clause specifying that 10% of the sale price would be held back for a year to meet future contingencies. The hold back would be put in escrow where it would gain interest for the sellers. They would also retain an additional $45,000, the difference between their receivables and payables, for the next year. At closing, Quincy and Latisha gave big bonuses to their employees from the proceeds of the sale and stayed on as paid consultants for 12 months, helping to build community ties for the new owner.
THE REAL WORLD: CLOSING
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wo day before closing, the buyer said they had to delay due to internal problems. We were devastated, so I called our advisor, who followed up with the buyer. Our advisor said it might be a negotiation tactic and that we should wait 24 hours. I didn’t say anything to the managers, but I was worried because we had waited too long to sell in the first place. The next day we learned the closing was only delayed two days. The transaction went well, and I believe that with new management our company will actually provide even better service.”
“I
thought we would sell our business online in 90 days or less, and it wasn’t close. We got so tired of talking to people all day long and neglecting our patients that I we took it off the market. One of our competitors called about four months later. They were well-organized and offered an acceptable price, so we sold to them. We didn’t stick around, and they made a lot of changes and let quite a few people go. We were burned out, but I regret the way we did it.”
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Leaving Home (Your Baby is on Her Own) At some point in the latter stages of your journey, you begin to realize that a transaction will ultimately occur. You will no longer be the owner of the company you created and nurtured. Your baby will begin a new life. Even if your transaction itself turns out to be seamless, you’ll still be challenged on a personal level. Based on conversations with many owners who have sold their businesses, here are some words of wisdom: Unless you have been an absentee owner for a long time, you will experience an emotional reaction to
the transition. Talk it through with a life partner, friend or even a counselor. This may be the most significant change in your entire professional life. A common reaction is a sense of loss. You may say you’re relieved to be out from under the business, but
you made a large personal investment in it, nonetheless. How do you handle grief? Most owners say they experience a process of “letting go,” as they know they have lost something significant. Given your life themes/scenarios, what are you going to do in the next stage of your life? Suddenly, the ques-
tion becomes: What will I do now? Many healthcare entrepreneurs are so focused and goal-oriented that once they get through the transaction they’re ill-prepared for the next phase. This is the transition. It can feel wide-open and ill-defined. Much like the process of letting go, your transition demands a gradual re-focus and the creation of new goals. Part of that re-focus is an evaluation of your health and habits. One former owner told me that his drinking
had increased markedly during his transition. He acknowledged that he had always felt a “void,” which he managed to partially fill with work. But once he sold his business that void only got larger until he sought professional help. Many former owners notice dramatic changes in their energy level. Typically, it spikes during the transaction
and then drops as daily contact with former employees decreases. Isolation deepens this feeling of low energy. Maintaining interactions, friendships and relationships after the sale will keep you on an even keel. Celebrate! Lastly, as you move on I urge you to celebrate what you’ve accomplished, even if the transition was less than ideal. You gave birth to your baby, nurtured her and made a difference in the world. You had the courage to take a risk and in the process benefited others. Congratulations and good fortune for the rest of your life!
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THE REAL WORLD: AFTER THE SALE
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“M
he day we closed was not a big deal. Just signed some papers and went back to work for a couple more months to help the new owners. I had already begun moving out of my office and spent most of my time on new fundraising projects. After the closing we had a big party for the employees and new owner. I think everyone enjoyed themselves, and it seemed to bring some closure.”
y husband insisted we go see a therapist. Our marriage was okay, but after going from 60+ hour weeks to not working I was climbing the walls. After about 30 minutes in our first meeting I just started crying and it all came out—sadness, fear, anxiety, everything. That’s when things started to get better. I still wondered what was going to happen next after things being the same for the last 11 years.”
“M
“B
y goal was to get the deal done so we could take the next step in our lives. After we closed there wasn’t a celebration. We just went out to dinner and that was it. There wasn’t even a check because the money was wired to an account. I wasn’t prepared for how “down” I felt. At the same time I was excited. It took a while to sort out those feelings.”
efore we had completed the transaction I started another business selling specialty items online. We have grown it into a successful business, but we keep it purposefully small so we have more fun time than we did with our pharmacy.”
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Postscript: Surfing the New Normal
G
oing forward, the marketplace for healthcare businesses will be increasingly dependent on several interrelated elements:
1. The integration of acute and long-term care services 2. Alliances among competitors 3. Increased cooperation among buyers and sellers, with novel management and acquisition arrangements 4. Growing efforts to consolidate everything from pharmacies to substance abuse treatment programs 5. Public funding and benefit reductions with new performance-based contracting models 6. New service models with customer-centric, lean management 7. Innovation in science and technology The combination of these elements and others unknown are creating a new marketplace that many call the New Normal. The New Normal is this evolving turbulence of change, occurring simultaneously on many dimensions. Surfing the New Normal requires maintaining a vision that allows you to ride the new opportunities, while avoiding the shoals of failure. The mantra of many healthcare entrepreneurs—doing well and doing good—is alive, even as the marketplace rapidly shifts. Increasingly more healthcare services are paid for out of pocket; private insurance companies are now also managing complex public healthcare systems; and scientific advances are fueling dramatic growth by making new products and services affordable and accessible. While many owners grudgingly accept the dramatic cuts in public programs that grew steadily for decades, they are also creatively repositioning themselves with the same courage they mustered when they first gave birth to their baby. When many of us began our business a generation ago, the marketplace was equally unpredictable, but somehow we succeeded. The same is true today. There are big, challenging waves coming along all the time. The market is larger than ever; there is always a new and inviting wave rising for great surfing.
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Resources
T
here are many guides for selling a business, but very few focus on small healthcare businesses. Below are a few general publications healthcare entrepreneurs will find useful.
Snow, Bill. Mergers and Acquisitions for Dummies, Hoboken, NJ: John Wiley & Sons 2011. Very readable step-by-step guide to the acquisition process, including tactical suggestions for sellers who may choose to represent themselves. Fleming, Quentin. Keeping The Family Baggage Out Of The Family Business: Avoiding The Seven Deadly Sins That Destroy Family Businesses. New York: Fireside, 2000. Great information on succession planning and transition issues in family businesses. Holton, Lisa and Bates, Jim. Business Valuation for Dummies, Hoboken, NJ: John Wiley & Sons, 2009. Clear presentation of basic valuation concepts for the lay person, with useful tips for service-oriented healthcare professionals. Horn, Tom. Unlocking the Value of Your Business, Ephrata, PA: Charter Oak Press, 2008. Down-to-earth presentation of many seller-related issues. Includes a small section on healthcare businesses. Leonetti, John M. Exiting Your Business, Protecting Your Wealth: A Strategic Guide for Owners and Their Advisors. Hoboken, NJ: John Wiley & Sons, 2008. While quite technical, this book provides sound advice on exit preparation and structuring a management buyout. Roderick, Scott. An Introduction to ESOPs (11th Ed). Oakland, CA: NCEO, 2010. The definitive introduction to ESOPs at a bargain price. The 12th edition will be released in November 2011. For other employee-friendly, non-ESOP options you can find excellent information at www.nceo.org. Steingold, Fred S. The Complete Guide to Selling a Business (3rd Ed), Berkley, CA: NOLO, 2007. Incredibly detailed guide to selling a business, with excellent section on preparing a business for sale and selfadvertising. Includes information on the rapidly increasing opportunities found on the internet. Warrillow, John. Built to Sell: Creating A Business That Can Thrive Without You. New York: Portfolio/Penguin, 2010. Though not focused on the actual sale transaction, the personal stories about the decisionmaking process provide excellent background.
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Bio Tom Schramski is a Licensed Psychologist, consultant, mentor and entrepreneur. In 1980 he co-founded CPES, a pioneering healthcare organization serving people with disabilities and their families, and later led its transition to a 100% employee-owned company. Today, Tom serves as President of Salience Consulting Group (www.salienceconsulting.com), a strategic consulting firm, and as a Vice-President of American HealthCare Capital (www.americanhealthcarecapital.com), a national mergers and acquisitions firm. He publishes two monthly e-newsletters, SalientWaves and Perceived Value and blogs about creating extraordinary business value. Visit: www.salienceconsulting.wordpress.com. He has also been featured in Inc. magazine and the book Equity: Why Employee Ownership is Good for Business, published by Harvard Business School Press. Tom lives in Tucson, Arizona with his wife, Christy, and their daughters, Daisia and Akilah. He welcomes your questions and comments: tom@salienceconsulting.com
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