As private equity acquisitions of healthcare businesses have surged over the past decade, investments in physician practices and physician practice management (PPM) companies have accelerated apace. PE firms have become increasingly comfortable investing in a wider range of physician practices including orthopedics, gastroenterology, and urology. As acquisitions shift to more complex medical subsectors, a tailored due diligence process will be increasingly important. CFGI’s transaction advisors view the following to be critical success factors to getting the deal done right.
#1. The basics need to be done correctly
The smaller the practice, the more likely that bookkeeping will be unsophisticated and financial reporting will be tailored to cash or modified-cash tax reporting. That’s why cash proof and cash collection waterfall analysis of revenue and cash receipts remain critical elements of financial due diligence. Additionally, determining how key working capital accounts (accounts receivable and accounts payable) will be treated after the close is essential. PE funds must also assess debt and debt-like items, including unfunded compensation such as bonuses, student loan pay-off commitments, and retirement plan liabilities.
#2. More meaningful sell-side due diligence
As the complexities of target companies increase, it’s more likely that initially agreed-upon deal values based on limited information will be challenged by due diligence findings. Having an independent sell-side due diligence report can validate the asking price. Even limited-scope, sell-side financial housekeeping can help facilitate value capture on both sides as more deals are closed and the aggregate deal flow of physician practice transactions increases.
#3. Coordinated buy-side due diligence
After the exit of an initial buyout, secondary transactions are often executed through a competitive bidding process, with sophisticated buyers and sellers on both sides of the table. This can produce a compressed timeline in which a buyer may need to conduct financial due diligence work in parallel with other diligence workstreams, such as legal, reimbursement, regulatory and operational. In today’s tech-enabled world, efficiency can be gained by simply encouraging and facilitating collaboration across due diligence service providers and then sharing relevant findings and data—while retaining the cost benefits of using boutique specialists.
#4. More advanced data analytics
In addition to reviewing the general ledger and billing and collections, a proper analysis should scrutinize charges, service codes, and procedures performed. This assessment should be as granular as possible, ideally on a transaction-by-transaction basis. Likewise, identifying outliers in reimbursement and operational activity is critical to compliance risk assessment. Use of enhanced data-analysis tools and approaches facilitate identification of risks and opportunities and allows for more sophisticated modeling and risk identification in a target business.
#5 Harness new data sources
PE firms should consider multiple internal and external factors when analyzing revenue. Similarly, analysis of payer mix can involve assessment of complicated networks that are outside of traditional payer relationships. Lenders may focus on what reimbursement should be rather than current or historical amounts.