Pinnacle Blog

  • Pinnacle’s Director of Business Valuation, Alex Kajan, was quoted in The Ambulatory M&A Advisor’s article “Building a Bridge Over the Value Gap in a Transaction”

    In a healthcare M&A transaction there are times when the value of the selling business is not on the same level as both the buyer and the seller.  Perhaps things were missed in due diligence,  or the buyer cannot raise the funds the seller is asking for.  Regardless, these issues occur, and The Ambulatory M&A Advisor shows the different ways that sellers and buyers can potentially bridge the value gap and seal a deal with minimal roadblocks.

    Peter Greenbaum, Business Law and Healthcare Attorney for Wilentz says that a valuation gap mean between a seller and a buyer is all about perception and expectation.

    “A seller perceives their business to be worth more than a third party perceives it to be; it gets back to perception.  It’s not uncommon that sellers want as much as they can and buyers want to pay as little as they need to.  You have a natural conflict in the way money works, and it oftentimes results in a gap in the valuation,” Greenbaum says.

    “You would like to believe that if you have a reasonable buyer and a reasonable seller, you are going to have a gap that is not too drastic.  When you have one party that may be out of line with what the market is bearing that is when you are going to have a bigger gap.  As long as everybody comes in with eyes open and aligned with what the market can provide and with the way they value the business, there will usually be some sort of gap but a gap that the businesses can work through.”

    Alex Kajan, Director, Business Valuation with Pinnacle Healthcare Consulting believes that the most effective way to bridge this gap is to find ways to grow revenue, reduce expenses, or reduce the riskiness of an investment in the selling company during the years leading up to the sale of the business.

    “There are a number of ways to do this and all of these are taken into account in determining the fair market value of a business.  Adding ancillary services to the business can enhance revenue potential.  Utilizing mid-level providers or negotiating better contracts with vendors can both help reduce expenses and enhance profitability.  These are the issues that most business owners easily identify, but often neglect to consider the riskiness of an investment in their business.  Concentration of referral and revenue sources, key person risk, lack of geographical diversification, and poor payor mix are common risks identified in the valuation process,” Kajan says.

    Kajan adds that if an owner did not focus on growing revenue, reducing expenses, or reducing the riskiness of an investment in the business prior to initiating their exit strategy, other methods can be employed depending on the facts and circumstances of the transaction.  For example, does the owner wish to retire or is there potential to remain engaged in operating the business to some extent.

    Greenbaum goes on to explain that there are many ways that a buyer and seller can bridge the gap between the differences in value that may arise.  According to Greenbaum, the earn out provision is a very typical way of bridging that gap because typically in an earn out, the buyer can reward the seller slightly more than they otherwise would have.  It allows the seller to, while taking some risk, get a greater upside.  At the same time, from the buyer’s perspective, the buyer has a comfort level that the business and revenue stream that it is buying, is in fact there.  Therefore, often times in the earn out, a buyer will share more than they would otherwise would have been paid if it was a straight up purchase price.

    Brian Berlandi, managing partner, Berlandi, Nussbaum & Reitzas LLP  adds that an earn out is also the kind of gesture a seller makes for a buyer who might have difficulty getting traditional financing from a bank therefore, pushing a value of the business that the seller does not see as fair.  Berlandi says that this is one of the benefits involved in the deal for the buyer.

    “The seller may have a buyer who wants to buy the property, but the buyer is having trouble getting traditional financing.  The seller doesn’t want that to kill the deal, so it offers to finance the property for the buyer to get the deal done.  It’s usually not the first choice of a seller to do that, but if it doesn’t have a better option and wants to keep the deal intact, a seller will offer it,” Berlandi says.  “For buyers, if you can’t get traditional financing, which will usually have better interest rates, you are still able to consummate the deal because the seller is financing it for you.  It’s good for the seller and good for the buyer to keep the deal intact.”

    Kajan explains that earn out provisions can be useful if a seller believes the current fair market value is not representative of what the fair market value would be over the next several years.  Generally, with an earn out provision, there is an upfront payment for the business and an additional payment (or payments) that the seller will receive contingent upon achieving predetermined financial goals after the transaction closes.

    “If the seller believes the business is truly worth more than the current fair market value, this is a way for the seller to capitalize on the future success of the business should the financial goals be achieved.  I would note that to the extent the earn out provisions are aligned with services referred from the seller to buyer post-transaction, legal counsel should be consulted as the earn out could be viewed as a payment for future referrals,” he says.

    Kajan says another way to bridge the gap is through seller notes.

    He says a seller note allows the buyer to pay for the business over time.  If the seller is willing to forgo a large portion of the upfront payment, the note can provide interest for the seller over time.  This could be an attractive option for a business owner who is willing to shoulder this additional risk in hopes of a greater return.  Additionally, as dollars in the future are worth less than dollars today, this could be attractive to the buyer if the interest rate on the note is manageable.

    Greenbaum says that from a buyer’s perspective, the seller holding the paper will give the buyer a little more comfort that the seller will stand behind the business.

    “A buyer’s fear is that the seller’s representation in terms of the revenue stream among other things, may not materialize.  If the seller is willing to hold paper, it will give the buyer a little more comfort that the seller will stand behind what the seller has in fact said the economics are.  If it’s not there, then the seller is not going to get paid.  It’s a way of keeping the seller’s skin in the game that otherwise would not have been there if it was an all cash deal where the buyer either had their cash in pocket or from a third party bank.  Once that happens there is no real skin in the game from the seller’s perspective, and that is when the buyers become concerned,” Greenbaum says.

    Although selling less control of the company to a buyer is a way of addressing the bridging of the gap in a sale, Greenbaum says more often than not, it can create problems.

    “When a buyer comes in and wants to buy a company, they typically want to buy one hundred percent of the company; they do not want a partner.  They do often keep the sellers around or need the sellers to stay around, whether for employment related reasons or from a transitioning perspective in the sense that the sellers are the ones knowing how to run the business and therefore need to effectively teach the buyer,” he says.

    “Beyond the service component, whether it is a long-term employment relationship or just a short-term transitioning relationship, moreoften than not, having buyers and sellers remain partners post-closing, that is not the objective of either side.  You have a seller that wants to cash out and move on typically, therefore, remaining on as co-owners or partners after a closing doesn’t necessarily achieve that goal.”

    Kajan says the success of this strategy really depends on the seller’s willingness to remain engaged with the business over time.

    “Buyers are generally seeking to gain control of a business.  To the extent a seller is willing to sell a controlling interest in their business and a buyer is willing to allow a seller to remain engaged as a minority interest holder, there could be value to positive changes the buyer could make to the business after the transaction occurs.  This can come in the form of greater geographical reach, economies of scale leading to more favorable contracts, etc.  The issue this can create for a seller is that they now have a minority interest in a company that is more difficult to liquidate and they also now lack control should disagreements come about in the future.  A seller really has to consider what benefits the buyer could bring to the table post-transaction and whether or not they want to remain onboard with a business they no longer control,” Kajan says.

    If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.


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  • Seasons Greetings from Pinnacle!

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  • Season’s Greetings from Our Family to Yours!

     

     

    From Our Pinnacle Family to Yours,

    Season’s Greetings!

    Thank you for you continued support.  We wish you a happy and healthy New Year!

    Pinnacle Seasons Greetings

     

     

     

     

     

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  • Season’s Greetings! From all of us at Pinnacle Healthcare Consulting!

    Pinnacle Healthcare Consulting Launches Strategy and Operations Division

    At this holiday season, our thoughts turn gratefully to those who have made our progress possible.

    We would like to personally thank you for your continued support and best wishes in 2014!

    Pinnacle Healthcare Consulting - Seasons Greetings 2013

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  • Pinnacle Healthcare Consulting Wishes You a Relaxing Thanksgiving!

    cropped-pinnacle-healthcare-consulting-launches-strategy-and-operations-division.jpg

    Though a single day is set aside, the thankfulness is year-round.

    The Pinnacle Team is grateful for your friendship and business.

    Wishing you a relaxing Thanksgiving with friends and family.

     

    Pinnacle Thanksgiving

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  • Visit Pinnacle Healthcare Consulting at the Fraud and Compliance Forum – Baltimore!

    Pinnacle Healthcare Consulting

    Visit Pinnacle Healthcare Consulting at the

    Fraud and Compliance Forum

    September 29-October 1, 2013
    Hilton Hotel
    Baltimore, MD
    Co-sponsored with the Health Care Compliance Association (HCCA)

    Program Description

    This program is designed specifically for compliance officers and health attorneys who must advise their clients and institutions on the latest developments in fraud and abuse and compliance issues. Attendees will hear from leading private practitioners and representatives from the Office of Counsel to the Inspector General, the Department of Justice, and the Centers for Medicare and Medicaid Services.

    Some of the cutting edge topics to be explored:

    • Assessing Fraud and Abuse Risks in Mergers and Acquisition Transactions
    • The CMS or OIG Self Disclosure Protocols – Which Is Right for You
    • Medicare’s Emerging Enforcement Tools: Revocations, Payment Suspensions and the CMS Fraud Prevention System
    • Compliance Across the Continuum of Care: Improving Quality and Avoiding Readmissions
    • Resolving Legal and Audit Issues in an Internal Compliance Investigation
    • The HITECH Rules are Here and We Need to be in Compliance: What Should you Be Doing?
    • Effect of Exclusion From Participation in Federal Healthcare Programs
    • Industry-specific Sessions for Hospitals, Home Health Providers, Life Sciences Companies, Long Term Care Providers, Managed Care Plans

    View the brochure.

    Luncheons

    The Fraud and Abuse Practice Group, will hold a luncheon and presentation on September 30.

    Title: A Conversation with Office of Inspector General Chief Counsel Greg Demske

    Faculty: Gregory Demske, Esquire (Presenter), Chief Counsel, Office of Inspector General, U.S. Department of Health and Human Services, Washington, DC, and William T. Mathias, Esquire (Moderator), Principal, Ober|Kaler, Baltimore, MD

    HCCA will hold a luncheon and presentation on October 1. Please note, there is an additional fee; pre-registration is required; space is limited.

    Program Materials

    We will not automatically be printing binders for everyone. All materials will be available on a website prior to the program and handed out on CD at the program. For those who still do want the binder they will be available for an additional fee; please order on the registration form.

    All registrants will receive an email a week prior to the program with a link to the materials. This website is for attendees only and is not posted to the public. You must have the direct link to the website. The email will come AHLA Member Services. To ensure registrants receive this email and is not caught by a spam filter, please white list msc@healthlawyers.org.

    Exhibitors

    View the Prospectus.

    About Pinnacle Healthcare Consulting

    Pinnacle Healthcare Consulting provides a range of strategic, financial and operational services to improve clinical and business performance for hospitals, health systems, physician groups and other healthcare organizations. Pinnacle Healthcare Consulting is a nationally recognized leader in business valuation, physician compensation, medical staff planning, performance improvement and compliance support. Other divisions of Pinnacle provide physician practice management, medical bill/coding, and technology/integration support services. Pinnacle’s array of specialized and highly responsive client services promote advanced innovation while our dynamic team solidifies strong client relationships and assists in solving your most complex challenges.

    Contact Pinnacle Healthcare Consulting Today – 303.801.0123 or kberkey@pinnaclegrouphc.com

    Visit: www.PinnacleGroupHC.com & www.PhysicianFMV.com

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  • Pinnacle Team Member Highlight – Alianna Williams, Valuation Analyst

    Alianna Williams_2013_-_Our_Team

    Alianna Williams
    Valuation Analyst
    Alianna joined Pinnacle Healthcare Consulting in 2013. As an analyst, she supports Pinnacle’s health care physician compensation division. Alianna’s work contributes to fair market value analysis of professional service arrangements. She additionally provides market research, analysis of health care data, and detailed financial modeling. Her past work experience includes an internship at Morgan Stanley.  Alianna graduated from the University of Colorado Boulder with a double major in integrative physiology and economics with an emphasis in business. With a detail-oriented mind set and hard work, she was near the top of her class – even while working to finance her own education. From serving as a live-in caregiver for an elderly woman with Alzheimer’s to evaluating the impact of health care regulations and the economic influences – Alianna is passionate about helping people and the health care industry.

    Expertise
    • Physician compensation planning and analysis
    • Financial analysis, forecasting and modeling
    • Health care industry trends and policy research

    Education
    • BA, integrative physiology, University of Colorado, Boulder, CO
    • BA, economics with an emphasis in business, University of Colorado, Boulder, CO

    Interests
    • Skiing, fly fishing and enjoying Colorado’s outdoors
    • Cooking and enjoying good food
    • Traveling to new places

    Contact
    E-mail: awilliams@PinnacleGroupHC.com

    Phone: 303.801.0120

    About Pinnacle Healthcare Consulting

    Pinnacle Healthcare Consulting provides a range of strategic, financial and operational services to improve clinical and business performance for hospitals, health systems, physician groups and other healthcare organizations. Pinnacle Healthcare Consulting is a nationally recognized leader in business valuation, physician compensation, medical staff planning, performance improvement and compliance support. Other divisions of Pinnacle provide physician practice management, medical bill/coding, and technology/integration support services. Pinnacle’s array of specialized and highly responsive client services promote advanced innovation while our dynamic team solidifies strong client relationships and assists in solving your most complex challenges.

    Contact Pinnacle Healthcare Consulting Today – 303.801.0123 or kberkey@pinnaclegrouphc.com

    Visit: www.PinnacleGroupHC.com & www.PhysicianFMV.com

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  • Visit Pinnacle Healthcare Consulting at HCCA’s Annual Compliance Institute!

    HCCA Annual

    HCCA Annual - Pinnacle Healthcare Consulting 2013

    About Pinnacle Healthcare Consulting

    Pinnacle Healthcare Consulting provides a range of strategic, financial and operational services to improve clinical and business performance for hospitals, health systems, physician groups and other healthcare organizations. Pinnacle Healthcare Consulting is a nationally recognized leader in business valuation, physician compensation, medical staff planning, performance improvement and compliance support. Other divisions of Pinnacle provide physician practice management, medical bill/coding, and technology/integration support services. Pinnacle’s array of specialized and highly responsive client services promote advanced innovation while our dynamic team solidifies strong client relationships and assists in solving your most complex challenges.

    Contact Pinnacle Healthcare Consulting Today – 303.801.0123 orkberkey@pinnaclegrouphc.com

    Visit: www.PinnacleGroupHC.com & www.PhysicianFMV.com

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  • Season’s Greetings from Pinnacle Healthcare Consulting

    Pinnacle 2012 Seasons Greetings

    Season’s Greetings! From all of us at Pinnacle Healthcare Consulting. At this holiday season, our thoughts turn gratefully to those who have made our progress possible. We would like to personally thank you for your continued support and best wishes in the new year!

    In lieu of gifts, charitable donations will be made to: Hands and Voices, Make a Wish Foundation and Cancer League of Colorado.

    About Pinnacle Healthcare Consulting

    Pinnacle Healthcare Consulting provides a range of strategic, financial and operational services to improve clinical and business performance for hospitals, health systems, physician groups and other healthcare organizations. Pinnacle Healthcare Consulting is a nationally recognized leader in business valuation, physician compensation, medical staff planning, performance improvement and compliance support. Other divisions of Pinnacle provide physician practice management, medical bill/coding, and technology/integration support services. Pinnacle’s array of specialized and highly responsive client services promote advanced innovation while our dynamic team solidifies strong client relationships and assists in solving your most complex challenges.

    Contact Pinnacle Healthcare Consulting Today – 303.801.0123 or kberkey@pinnaclegrouphc.com

    Visit: www.PinnacleGroupHC.com & www.PhysicianFMV.com

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  • In Case You Missed It: Valuation Considerations for Urgent Care Centers

    VALUATION CONSIDERATIONS FOR URGENT CARE CENTERSSummary.  Patient demand forurgent care centers is increasing and as a result transaction volume is also increasing.  Often with physician ownership, the fair market value of the subject center is required to determine a transaction price.  This article examines the market and demand for urgent care center services and reviews the methods to determine the fair market value of a healthcare business.

    UCC Overview.  Urgent care centers (UCCs) have operated in the U.S. for over 30 years.  There are an estimated 8,700 UCC facilities in the U.S. according to the Urgent Care Association of America, of which 4,500 are certified urgent care centers, and about 300 new facilities open each year.  The U.S. healthcare system faces issues with access to care, increasing patient needs, growing demands on primary and emergency care systems, and rising costs.  Urgent care is intended to improve access and lower costs.

    The majority of UCCs provide services in episodic primary care, occupational medicine, routine immunizations and school physicals, and at least half of them also provide lab tests, x‐rays, fracture and laceration care, and IV fluids.  UCCs are typically open significantly beyond standard 9 – 5 office hours, including nights and weekends.  Urgent care centers are owned by physicians, physicians groups, hospitals and corporations.  They are typically staffed with physicians, with approximately half also employing physician assistants and nurse practitioners as additional providers.

    Demand.  The urgent care center industry represents one of the fastest-growing segments of the American healthcare system.  With rising wait times for both primary and emergency care providers, urgent care centers have become an increasingly viable alternative for patients.  The UCC industry is expected to continue expanding over the next several years.  One of the main factors driving growth for the industry is increasing demands made on primary care providers.  Additionally, the Affordable Care Act will begin to take effect in 2014, expanding insurance coverage to millions of people by 2019, which will result in more demand for services that are offered at UCCs.

    The UCC service model is highly favored by many different user groups: college age – for those without insurance or a selected primary care physician, uninsured – because they know what the cost is up front, suburbanites with families to care for after the working day is over and seniors – who do not want the wait time they would otherwise experience in an emergency department.

    Challenges to newcomers.  Barriers to entry in the UCC industry are high.  Barriers include regulatory hurdles and the up-front costs to establish an urgent care center.  It is more difficult to enter the industry because urgent and unscheduled healthcare services require more highly trained and diverse staff, more costly equipment and more licenses than scheduled healthcare services.  Regulation can represent a major barrier for establishing urgent care centers.  The healthcare industry is subject to regulation by federal, state and local governments.  States with certificate of need programs place limits on the construction and acquisition of urgent care centers and the expansion of existing urgent care centers and services.

    Operational challenges.  UCCs are not immune from operational challenges.  Urgent care centers are affected by seasonality – busy during flu season but not as busy during healthy summer months.  UCCs are affected by the high fixed overhead costs of staffing and office space.  Similar to other healthcare facilities, lower utilization results in significantly low profits.

    Acquisitions.  UCCs may make more sense if they are owned by healthcare or hospital systems, insurance providers (e.g., Humana’s 2010 acquisition of Concentra Inc.) or large chains that can either support such businesses as a part of the overall continuum of care or absorb the overhead by running multiple facilities.  Organizations with ready access to capital are in a good position to acquire unprofitable UCCs, and occasionally, at bargain prices.  In cases where physician ownership is involved, these transactions must be consummated at fair market value to avoid running afoul of Stark and Anti-Kickback regulations.

    Fair market value.  Three-approaches to the valuation process may be applied to calculate the fair market value transaction price:  the asset-based, income and market approaches.  The income approach determines the value of the business is equal to the present value of the future benefit stream to the owners.  The asset-based approach estimates value by valuing each asset class of the business separately and then summing them up to derive the total value of the enterprise.  The market approach makes use of guideline companies traded on a public stock exchange allowing for a comparison to be made between pricing multiples of the public companies and the multiple deemed appropriate for the subject company.  Also, multiples may be determined from transactions of entire companies that have been bought or sold in the marketplace.

    The first step is to examine the historical financial statements (e.g., income statement and balance sheet).  The income statement should be studied closely to determine whether physician provider compensation is included in the expenses or if it is considered “below the line”.  If the UCC appears to be profitable before physician compensation is allocated, the business may in actuality be generating a net loss.  When a business entity, such as a UCC, is not a viable going concern it is appropriate to calculate value using the asset approach.  If the UCC is a viable going concern one would apply the income and / or market approaches to determine the entity’s fair market value.

    The asset-based approach is typically used when the business is no longer considered a going-concern business, a business that will operate into the foreseeable future, or if physician compensation consumes all of the excess profits of the business.  Assets commonly considered in the valuation of a UCC are:  medical equipment, computer hardware and software, office equipment, office furniture, leasehold improvements, supplies inventory, trained and assembled workforce in place, trade name, contracts, and real estate.  Assets typically excluded from the analysis are cash and accounts receivable since these assets typically are retained by the seller.  Medical records add marginal value and are typically not considered given the single episode nature of patients seen.

    The income approach is used when the business is considered a going concern.  The most common method under the income approach is the discounted cash flow (DCF) method, which relies on projected estimates of future benefits.  These benefits are converted to value by applying a discount rate and using present value procedures.  An advantage of using the DCF method is the ability to capture various potential outcomes such as future growth or decline, changes in reimbursement, and variable expenses such as provider staffing levels.

    As previously mentioned the market approach may be applied to determine a pricing multiple through the comparison of guideline publicly traded companies or guideline merger and acquisition transactions.  According to a publicly traded company screen using S&P Capital IQ, there are no publicly traded urgent care centers or businesses with the sole purpose of owning and operating urgent care centers.  However, there have been several guideline mergers and acquisitions in recent years according to a transaction screen using S&P Capital IQ and data available through Irving Levin Associates Inc.’s The Health Care Services Acquisition Report (published annually) and The Health Care M&A Report (published quarterly).  Although several transactions have occurred, not enough pricing information was made available to develop a multiple.  Therefore, it is common for valuation professionals not to use the market approach when valuing UCCs.

    Synergistic value.  We discuss the methods to determine the fair market value of a UCC but also want to recognize value beyond FMV.  The synergistic value is the value to a particular buyer who has the ability to create additional benefits of ownership not available to a financial buyer through synergies unique to that buyer.  Synergistic value to a healthcare system may come in the form of control over patient flow.  For a commercial insurer, patient access to healthcare is beneficial to its core business model.  Synergistic value may come in the form of economies of scale and inorganic growth for a small privately held owner and operator of (other) UCCs.

    Conclusion.  Urgent care centers should continue to see increased utilization due to their lower cost and more efficient patient throughput.  These strong growth prospects make them popular acquisition targets for larger healthcare entities.  When there is physician ownership of the UCC, it become essential that buyers have a well documented and defensible fair market value opinion to support the transaction price.

    About the author.  Jana Sizemore is a Business Valuation Consultant with Pinnacle Healthcare Consulting.  She may be contacted at 303-801-0107 or jsizemore@pinnaclegrouphc.com.  The information presented in this article is intended for general informational purposes and does not constitute the provision of legal advice.  The views set forth herein are the personal views of the author and do not necessarily reflect the views of Pinnacle Healthcare Consulting.

     

    About Pinnacle Healthcare Consulting

    Pinnacle Healthcare Consulting provides a range of strategic, financial and operational services to improve clinical and business performance for hospitals, health systems, physician groups and other healthcare organizations. Pinnacle Healthcare Consulting is a nationally recognized leader in business valuation, physician compensation, medical staff planning, performance improvement and compliance support. Other divisions of Pinnacle provide physician practice management, medical bill/coding, and technology/integration support services. Pinnacle’s array of specialized and highly responsive client services promote advanced innovation while our dynamic team solidifies strong client relationships and assists in solving your most complex challenges.

    Contact Pinnacle Healthcare Consulting Today – 303.801.0123 or kberkey@pinnaclegrouphc.com

    Visit: www.PinnacleGroupHC.com & www.PhysicianFMV.com

    Continue reading →