I was fortunate to attend the ViVE Conference in Nashville earlier this week. If you are not familiar with ViVE, which launched in 2022, it merges the leadership of College of Healthcare Information Management Executives (CHIME) and the HLTH digital marketplace.

Today I want to talk to you about quality of earnings (QofE or QoE). I want to focus on this single concept because it's become one of the reasons — if not the leading reason — why healthcare transactions go sideways.

The home medical equipment (HME) industry was long dominated by legacy manufacturers with a high barrier of entry. But over the past few years, we've begun to see cracks in the decades-old status quo emerge. 

So you're thinking about selling your healthcare business. Aside from starting your company, this might be the most important step you'll take in your career. The majority of healthcare sellers will be involved in an M+A transaction once, so there is only one chance to get it right. 

Getting it right typically involves working with the right healthcare advisor/broker. This person can help you find prospective buyers, identify the right buyer for you, and successfully navigate the waters of the transaction — which will likely be choppy at times — from beginning to end. 

To help you make a sound choice of a healthcare M+A advisor, here are some questions to ask yourself as you interview prospects.

It's January, so many of you may be reading this article for guidance on your 2023 M+A plans. Right about now, your internal dialogue may sound like, "I want to retire soon but the economy seems unstable, so why would I sell before it corrects?" Indeed, economic and industry indicators are mixed, almost like an economic whodunnit mystery with fingers pointing around the circle of suspects, all awaiting Sherlock to tell us when to initiate an exit. But if you step back from the scene of the crime, you will notice the partygoers are all buyers and sellers who share the same intention: to complete M+A transactions.

2022 proved to be a year that did not live up to everyone’s expectations. Riding on a wave of furious M+A activity in 2021, the initial optimism was met with bewilderment as buyers became increasingly selective and cautious in the transaction process as they sought to mitigate risk.  Deals that were expected to be straightforward experienced headwinds that led to a less-than-robust conclusion to the year.  Larger global economic issues, the continuing pandemic, and uncertainty in the political sphere undoubtedly influenced the healthcare M+A market.  However, we are already seeing signs of change in 2023. Deal activity is up and buyers still have a lot of dry powder to deploy.  The VERTESS team is pleased to offer its annual year-end review as well as the future outlook for each of the healthcare verticals our Managing Directors support.  We look forward to new challenges and successes in 2023!

It's been a wild ride for M+A activity in the healthcare space these past few years, with several significant global and domestic issues impacting deal flow. The effects of the COVID-19 pandemic will be felt for a long time. Russia's invasion of Ukraine has created global uncertainty. Domestic inflation has created cautious investors. Labor shortages have decreased profits for many providers.

All of these weighed down the healthcare space, yet it's estimated that of the $1.6 trillion in "dry powder" (i.e., unspent capital) globally, 15% is expected to be allocated to healthcare. And of that 15%, I expect a good percentage to go toward behavioral health.

Following the lull of transaction activity that affected all of healthcare in the first several months of the COVID-19 pandemic, the behavioral health space has experienced fairly steady transaction activity, including some large deals that had ripple effects throughout the space.

Congratulations!  You’ve just sold your business, completing an exhausting period spanning many months.  The process was made easier thanks to the support of an experienced healthcare M+A advisor, but you’re still relieved it’s over.

Yet, a question lingers in your mind: What do you do now?

This is a common experience for many sellers. After all, during the sales process, owners are often fixated on the day-to-day operations of their business or practice, negotiations with the buyer, valuation, and completing the sale. Little time was spent thinking about issues like:

Cleanup/follow-up issues that must be addressed.
The role, if any, you’ll have in the future success of your former business/practice.
How you can limit your future liabilities.
How you can help retain customers/patients and employees.
What becomes of your life post-closing.

Your post-sale experience does not need to be filled with such uncertainties.  Let’s look at what you can do, with the continued help of your M+A advisor, to make the transition from business owner to non-owner as simple and comfortable as possible.

There's the expression, "You never get a second chance to make a first impression." For many healthcare business owners thinking about selling their company, the first impression they may personally make on prospective buyers will come from a confidential information memorandum (CIM). And if that CIM doesn't represent the business in a professional, positive, and transparent manner, the owner may not get a chance to receive a fair offer.

What exactly is a CIM? It's the document used to market your business to potential buyers. It may go by other names, including a pitch deck, investor deck, the "book," or confidential information presentation (CIP). The document is typically called a CIM when used in the sale of a mature business and a pitch deck for startups.

The goal of the accounting function in any business, including healthcare, is to report on a company's transactions of economic substance. Financial reporting should be communicated in a way that is accurate, consistent, and timely. In the United States, accounting practices must adhere to generally accepted accounting principles (GAAP), which are organized and communicated through the Accounting Standards Codification (ASC). ASC is maintained by the Financial Accounting Standards Board (FASB). Revenue recognition for most healthcare companies is currently governed by ASC Topic 606, Revenue from Contracts with Customers.

In this column, I'm going to share my thoughts on today's behavioral health and intellectual and developmental disability (I/DD) markets. I'll speak to the macro environment because those issues are impacting the decisions of buyers and lenders. In turn, these issues impact the values buyers are willing to pay for your company. I’ll also address how you, as an owner in this space, can use this information for your own planning purposes — that is, how to do what’s best for you.

In September, VERTESS Managing Directors, joined by members of the business development team, attended three national conferences: Cape Cod Symposium on Addictive Disorders, The National Association for Specialty Pharmacy Annual Meeting, and The Home Care Association of America Annual Leadership Conference. Dominating the tradeshow floors were exhibitors in the healthcare technology space. We estimated that these companies accounted for 40-60% of the exhibitors — a common thread intersecting the three different verticals represented at the meetings.