Five Keys to Buying a Healthcare Business

Buying a healthcare business is an exciting venture, but also a stressful one. The negotiations can be challenging, the paperwork and regulations can be confusing, and you need to make sure that you’re buying the right business, or else your deal will create all kinds of problem in the future. To ensure that your deal goes smoothly, here are five key principles that you should follow.

Surround yourself with good advisors

You need a team of qualified advisors to guide you through your acquisition. At the very least, you need a lawyer and an accountant to handle the contract work for completing the sale. It is also helpful to have an M&A advisor who can find potential candidates looking to sell, determine the value of their businesses, and assist with the negotiations.

You should also consider an advisor who understands the healthcare industry and the specific segment you’re buying into. This is particularly important if you’re a first-time buyer who is new to healthcare. This advisor can help you evaluate candidates and will be there to support you with industry nuances as you take over. This could be an advisory board or a hired consultant. Whichever route you go, it’s just important to have someone who understands the intricacies of the healthcare industry.

Research thoroughly before making an offer

Before you move to the definitive purchase agreement, you really need to know what you’re buying. Take your time during the due diligence period to completely go over all the healthcare business’ records. Your accountant should closely examine all the past financial statements and tax records while your attorney should look for any potential legal issues with the new business. Unless you have the expertise, hire someone to thoroughly examine the referral sources and patterns.  Since the healthcare industry has unique business challenges, you want to make sure to uncover any problems before finalizing the sale. After that, these problems will be yours to deal with.

Look for negotiation opportunities

As you review the healthcare business, you should be on the lookout for ways to negotiate deal points to mitigate risk. For example, if there is a concentration of referrals coming from a handful of sources, consider terms that encourage a continuation of referral patterns until you can alter the strategy. This could be in the form of an earn-out or bonus payment if referrals continue to flow.

Figure out how to make a smooth ownership transition

You most likely have you own way of running a business and will want to implement some changes when you take over your new healthcare business. However, you have to be careful not to change too much, too quickly. Staff, patients and referral sources are always leery of any change especially through a change of ownership.  Sudden changes could offend both your new staff and patients, leading to higher turnover for both.

One way to maintain a smooth transition is to keep the previous owner on-board for the short-term. This way you could get their input as you take over and the shift will not be so sudden. You could also set up your purchase with a performance incentive for the past owner, like an earn-out. This way they will be motivated to see that your takeover is a success.   Just be sure that you and the previous owner are crystal clear on their new role in the business.

Consider your exit strategy before buying

Before you take over your new business, you should already thinking about your end-game for the purchase. What do experts say about the industry over the next five to ten years.  Will you sell to a strategic or financial buyer?  What characteristics do these buyers covet in an acquisition target? What growth and operational initiatives will need to be executed to achieve your desired exit valuation? You need to keep this end-game in mind as you negotiate or else you might agree on a deal that ends up preventing you from reaching your long-term goals.

Whether it’s your first healthcare acquisition or one of many, be sure to keep this advice in mind to make your deal a success.