Developing an Exit Strategy

With more clarity returning to the healthcare M&A markets, owners are starting to consider their options for selling their companies. But is this the right time to sell?  It is helpful to go through the exercise of develop an exit strategy to answer this question.  An exit strategy helps owners clearly communicate the organization’s priorities and better understand how those priorities will impact the value of their business upon exit.

Outline to develop a fact-based exit strategy:

      1.     Determine the company’s current value.  The purpose of the valuation is to establish a basis for future decisions and to identify specific value components that can be improved, regardless of industry conditions.  The valuation will be the foundation in determining the company’s strategic direction.  It’s helpful to have a professional healthcare valuation firm to do formal valuations.

      2.     Determine the exit value goals.  If the current valuation is not sufficient in the eyes of a an owner, it is helpful to clearly decide on what value the owner needs or wants to exit, d\efined as the target exit value.  While patient census, revenue and profits are important targets for setting operational and financial goals, when considering an exit strategy it is helpful to set a target exit value.  This value, defined as the amount of money the owner and shareholders will net upon the closing of the sale of their company, will also help in determining the revenue and profit levels that need to be met when executing the exit strategy.

      3.     Develop a value enhancing strategy.  Once the owner knows the company’s current value and has identified the target exit value, it is import to develop a strategy to achieve that value by formulating a value enhancing strategy. A value enhancing strategy will set the major priorities an organization will focus on in order to achieve its desired exit goals.  There are five main questions owners should ask themselves when developing their priorities for a value enhancing strategy:

            a.      How much will each priority cost?

            b.      Does the company have enough capital to execute each priority?

            c.     How long will it take to execute each priority?

            d.      How much of an impact will the achievement of each priority have on the company’s value?

            e.      Does the company’s management team have the depth, ability and energy to execute and ultimately achieve the desired results of each priority?

While these are difficult questions, if management cannot answer them clearly or does not have a solution to a negative answer, then their efforts will be met with frustration. It is important to assess whether or not it is worth the effort, time and capital to execute the value enhancing strategy.  If the return is not, then an owner should strongly consider selling sooner rather than later.

Know the process of selling a company.

Many owners underestimate the time and effort involved in selling a company.  A clear understanding of the process will help the owner determine when to begin executing the exit strategy. Not fully understanding the acquisition process and what is involved in each step can cause a company to miss opportunities, which could result in value left on the table.  To prevent this from happening, an owner should consider the following:

  • An acquisition could take 4 to 12 months to complete, depending on market conditions and the goals of the seller.
  • If the seller is not planning on retaining equity in the company, a buyer will typically want the seller to stay on for at least 6 to 24 months post-acquisition.
  • Whether they are company specific or related to regulatory policies, changes in market conditions could have significant influence on merger and acquisition activity and a company’s value.   Understanding the impact of market changes can assist in determining the right timing for a sale of a business.

Have a clear idea on what value you want to exit at and the process it will take to achieve those goals is essential to a successful exit strategy.