Here’s a Guide to Getting the Best Price
By Bill Siren and Ryan Meadows
Independent owners of dialysis clinics are facing a moment of truth. Medicare reimbursement rules are changing—resulting in lower payments for many clinics—and it is only natural to ask: “Is now the time to sell?”
Increased sales activity indicates that many owners—be they nephrologists, hospitals or others—are answering yes. Many fear their clinics will go into the red once Medicare begins making “bundled” payments for dialysis, medications and laboratory tests beginning next year.
But deciding to sell and getting a good price are two different matters. The keys to dealing with the large dialysis companies, who are the main buyers these days, fall in two main categories:
- Preparing the company so it will show to buyers in the best possible light.
- Knowing how to conduct the sales process to secure the best price from among a group of buyers.
Doing it right can mean the difference between getting an average price—currently around 5.5 times earnings—and something much better. In a recent deal in which we represented the sellers, that multiple was more than 12 times. While not every deal will bring a multiple of 12, based on our extensive experience advising both sellers and buyers in every phase of these transactions, we can offer the following tips for obtaining a good price.
Showing Well—Maximize EBITDA
Sales prices are generally calculated as a multiple of EBITDA, which is earnings before interest, taxes, depreciation and amortization. A large part of the pre-sales process is about making sure that a dialysis clinic, or group of clinics, is showing the best EBITDA possible.
Whether the clinic owners do it themselves or retain a professional to assist, the preparation process is the same: conduct an initial valuation of the business. This can be a fairly complex process, and owners are best advised to use a certified valuation professional. The valuation is a must so owners will know later how to position themselves in negotiations. A relatively low valuation is also a signal that the owners might want to consider taking serious measures to improve performance before attempting to sell.
To maximize EBITDA, there are some basic steps owners should take to improve earnings.
- Make sure expenses are under control. Look at benefits levels for employees, overtime usage, pharmaceutical contracts and other supplies agreements.
- Review the revenue cycle. Make sure it is being conducted as efficiently as possible from patient registration to collection of payments. For example, are all procedures being coded properly for insurance reimbursement?
- Don’t take excessive amounts of cash out of the business.
- Improve the payor mix. At least 15 percent of patients should be covered by commercial insurance.
- Examine the physical plant. Make improvements where appropriate. Is the building in good shape and aesthetically pleasing? What’s the condition of the IT system? The medical equipment? It all doesn’t need to be perfect, but should be in good shape. Potential buyers are looking for hidden land mines and if they find them, their offer will be lower.
- Conduct rigorous due diligence. Owners should be as tough on themselves as prospective buyers will be. All financial records should be completely transparent. There is nothing more likely to sour a deal than any indication that the books have been cooked, or even parboiled.
In most cases, except for something like the need for major building repairs, improvements can be made to the company’s position in a month or so. Then, before the company can be offered to prospective buyers, a quarter (three months) must pass in which the result of improvements can be demonstrated in financial results.
Now the buyer is ready for the second phase.
Getting a Good Price, Holding the Deal Together
There are numerous considerations in the sales process. As we mentioned earlier, it’s one thing to get an offer, but quite another to get a good offer. And once an offer is on the table, it is far from guaranteed that the deal will close.
Sellers who want to do it themselves should be realistic about the time commitment required to do it right. As an example, in a recent deal in which we represented the sellers of a group of three clinics, we devoted more than 1,000 hours to the process. And that does not include substantial time spent by the company’s CEO and his staff.
Here are some major milestones in the process, along with tips for getting the best result and keeping things on track.
Put together the “book.” To make a credible offering to the big dialysis companies, owners need a polished guide that describes the properties involved, their history, the people involved, patient volumes and the financials.
