When is it time to stop throwing good money after bad and either try to sell your business or simply take your lumps, close it, and move on? I’ve received quite a few calls and emails recently about businesses going under. Some of these failures are due to poor planning/execution, some are due to an initial lack of capitalization, and, finally, some are due to a credit crunch (when banks promised a line of credit but then called the note or cancelled the line).
If the reason your business is failing falls into the first category—poor planning or execution—chances are that it is going to be tough to sell. The field of groups buying medical businesses is very sparse, and believing they are going to pay cash for your mistake is unrealistic unless the initial mistake is easily correctable and, but for your lack of financing, you could fix it yourself.
If, however, the reason your business is struggling is due to a lack of initial capitalization and/or the credit crunch, you may be in a position to sell or at least have a group assume the liabilities, allowing you to exit the business somewhat intact.
What will the potential buyer expect when evaluating your business? First and foremost: be brutally honest. Trying to hide some bad facts (failure to pay taxes, undisclosed lawsuits, less than arm’s length transactions, etc.) is not only deceitful, it will delay and, most likely, derail the sale once discovered.
Due diligence is much like an awake colonoscopy: the preparation is awful, the procedure painful, and neither party enjoys the process very much. The ultimate purchase agreement is only as sound as the parties signing the document, and if the relationship starts with a lie, it is doomed for ultimate failure.
The second expectation the potential buyer will have are that your books are accurate, (hopefully) accrual-based, and timely. The value of your business will most likely be based upon the EBITDA (earnings before interest, taxes, depreciation and amortization) generated during the last 12 months, referred to as “trailing 12 months EBITDA” or “TTM EBITDA.”
If your books are “cash basis,” the prospective buyers will want to convert them to an accrual basis, which will take some time.
The cleaner and more accurate your books, the shorter the process and the more likely the sale will actually close. At the very least, have the following documents on hand prior to any serious discussions:
- Health plan “MCO” contracts
- Building leases
- Equipment leases
- Employee contracts
- Provider contracts
- Cash flow, balance sheets, and profit-and-loss statements
- Pending lawsuits
- Payroll data
- Collection history
- Payer aging reports
- Any relative reports to your business such as patient volume reports, website analytics, white papers and so on.
- Medical malpractice claims history and insurance policy.
- Marketing material and analytics
All in all, there is a lot that goes into selling your business. I highly recommend that every business you start, you create an exit strategy – at the outset.