Even before the pandemic unfolded, the rehab industry had been moving toward greater consolidation as larger corporations absorbed smaller ones. And given the financial toll COVID-19 has had on clinics, there is a good chance merger and acquisition (M&A) activity in the rehab therapy industry will accelerate in the coming year.
One trend in particular we’re seeing is larger operators taking over leases and operating expenses (such as salaries) for smaller organizations, helping clinics rebuild without having to exit the industry altogether.
So whether you’re looking to sell, you want to take some money off the table, or you are simply weighing your options, here are some steps to help you navigate the M&A process—and ensure a smooth sale at a maximized purchase price when the time is right.
Get your ducks in a row.
When you’re selling a business, you’re essentially selling two things: operations and financials. And the healthier these two components are, the higher your chances of securing top dollar for your practice. This is why getting your house in order is a critical first step in showing that your clinic is a sophisticated business ready for sale. To ensure your clinic’s operations and financials are up to par and running smoothly, we recommend doing the following.
Document policies and procedures.
Written policies and procedures are standard practice in any business—and they’re a quintessential component of the acquisition process. Not only are they a means for important legal and financial protection, but they also help ease the process of handing over your clinic. Here are some policies your practice absolutely must have documented:
- Organizational structure: Who is responsible for which aspects of the business?
- Vendor and supplier relationships: Aside from a list of the contacts, how did you establish these relationships? How do those relationships impact your day-to-day operations?
- In-house communications: How do your therapists and office staff communicate to ensure patient care plans are managed appropriately? What are standard protocols that all therapists must meet?
- Hours of operation: What are they and do they change on certain holidays?
- Patient engagement and dropout: What happens if a patient leaves before they complete their course of care? How do you re-engage them? What patient retention strategies do you have in place?
- Marketing: What is your clinic’s marketing strategy and budget? How frequently do you reassess your marketing approach and goals?
- Hiring practices: How does your team source, vet, and hire new talent?
- Social media policy: Which platforms does your clinic have, and do you have a social media strategy for each? Who is in charge of maintaining these platforms?
Ensure your financial statements are clean.
In addition to proving your clinic’s operations are transferable, you’ll need to show that its financials are properly accounted for. Buyers will most definitely look at your clinic’s bank statements as well as its profits and losses (P&L) statements (a.k.a. income statements). If these don’t add up, buyers could see it as a major red flag.
To prevent this from happening, make sure you reconcile your books at the end of each month and produce monthly P&L statements—as well as correct any discrepancies that may crop up. Also, consider compiling year-over-year comparisons to give buyers a clear snapshot of your clinic’s growth. People ultimately want to buy businesses that have a history of growth, and if you can prove this, you make your practice more attractive for sale.
Have your operational metrics handy.
In the past, we’ve talked extensively about the role key performance indicators (KPIs) play in meeting business objectives and demonstrating your clinic’s overall success and viability. As a refresher, KPIs are metrics used to measure how far your clinic has come, how far you still need to go, and how your organization stacks up to other clinics in your area. All of these factors will inevitably influence an acquisition or sale. It’s always best to know the story your metrics are telling before a potential investor does.
KPIs will vary with each practice, so make sure you’re measuring the things that align with your clinic’s key areas of focus. Some metrics buyers will be interested to see include:
- Net revenue per month;
- Net revenue per visit;
- Payer revenue per patient;
- Revenue per therapist;
- Net collection rate;
- Denial rate;
- Customer lifetime value;
- Customer acquisition cost; and
- Patient conversion rates.
Review, update, and make copies of your leases and insurance contracts.
Although this is fairly straightforward, there are two things under this umbrella worth mentioning:
- Know the start and stop dates for your leases, as well as the contractual exit language they include. For example, will your lease automatically renew, or will it end at a predetermined date?
- Know the assignment clauses in your leases and contracts. For example, does the language allow the contract to be transferred in the event of new ownership? If not, the buyer may need to renegotiate a number of leases as part of the transaction, and this should be flagged upfront.
Prioritize investor relationships and alignment.
What is motivating you to sell all or part of your business? Are you looking to unload the risk and stress of managing a clinic? Are you planning to retire? Or, are you seeking funds to build a bigger asset? Regardless of which path you’re taking, the objective here isn’t to just find the first person who will write you a check. Rather, it’s about finding the right buyer at the right time—ideally someone who aligns with your clinic’s culture, values, mission, and people, and who is committed to seeing your specific goals through. Therefore, you must do your due diligence.
Seek out and stay in touch with buyers in your area—ideally before you’re ready to sell. In other words: vet before you’re ready. Establishing relationships with potential investors doesn’t mean you have to commit to them. Rather, it provides you an opportunity to learn more about their goals, vision, and culture—and guarantees you’ll have options when it comes time to sell.
At the end of the day, you, your employees, and your patients will have to live with the decision you make. This is why dealings like these can sometimes take years to finally come to fruition. Don’t rush it, and take every call—you never know where it may lead.
Increase your clinic’s valuation.
Your clinic is more than a business—it’s an asset. And with any asset, you’ll want to know not only its value, but also how you can raise it. In addition to ensuring your contracts, policies, and financial statements are up-to-date and easily accessible, some other ways to increase your clinic’s value include:
- Hiring top talent who will move your clinic forward in alignment with its mission;
- Maintaining a stellar reputation, both online and off; and
- Proving your clinic has the necessary resources to grow.
For a more detailed description of the factors influencing your clinic’s worth, check out this blog post.
Spruce up your space.
Similar to the sale of residential properties, aesthetics play a significant role in the sales process. Ask yourself, “What would a buyer think if they walked into our clinic right this instant?” Buyers want to see that the clinic is well cared for, clean, and maintained. The more turn-key, the better. The need for capital investments to renovate the space will impact purchase price negotiations and give the buyer leverage to undercut your asking price.
If your clinic is in need of modern updates and small renovations, we’ve documented a few inexpensive fixes in this blog post.
Hire outside help.
This process is time-intensive and demanding. You likely won’t be able to do it all on your own and maintain your current day-to-day responsibilities with the practice. In addition to delegating certain tasks—like policy and procedure documentation—to your internal team, consider hiring outside help to streamline this process and ensure nothing falls through the cracks.
We recommend contracting with someone who can help get your finances straightened out and ready to go as well as seeking out a skilled M&A attorney to mitigate legal risk. You’ll be glad you did once this is all over.
Regardless of whether you’re looking to sell or get acquired, the majority of these steps are solid and enduring business practices to get in the habit of now. They will help you see where your clinic has been, and more importantly, where it is in its life cycle and growth trajectory. Plus, if the time to sell ever arises, these measures will ensure you’re fully prepared.
If you have any further questions on how to prepare your clinic for sale, we’re here for you. Simply drop them in the comment section below.