This article is sponsored by The Braff Group. In this Voices interview, Behavioral Health Business sits down with Nancy Weisling, Senior Advisor, The Braff Group, to discuss key strategies for maximizing value in a sale. She explains how cash and timing factor into a behavioral health deal, as well as the importance of recasting financials and sequential presentations in optimizing the outcome.
Behavioral Health Business: What life and career experiences do you most draw from, in your role today?
Nancy Weisling: My experience running behavioral health programs has been invaluable. Working in various operational roles, including direct care and as a special education teacher, has proven my credibility with business owners. Building solid relationships with my clients has been the key to my success.
How can the timing of a sale impact value?
When you consider the timing of a sale, there are two key factors at play. First is the current growth stage of the business, and the second is the sustainability of that growth. If a business is declining, it’s generally not the best time to sell since buyers often perceive it as a distress sale. In this scenario, it’s unlikely that sellers will be able to maximize their value.
On the other hand, selling during a period of hyper-growth — where some businesses might be growing at rates like 100% — might seem ideal, but buyers often view this level of growth as unsustainable. They may be skeptical that this volume or velocity of growth can continue, which also has the potential to undervalue a business.
All factors considered, the optimal time to sell is when a business is experiencing steady, mature growth around 15% to 30%. This growth rate is often seen as sustainable, and selling during this phase can help achieve the maximum value.
Is cash the only component of value?
No. Everyone says cash is king, right? It really plays a big part because at the end of the day, when you close a deal, cash is tangible. It’s what you walk away with — money in the bank at closing. However, there are many intangible elements that also create value.
A great example of intangible value is when a company is substantial enough to be a platform. Platforms have the necessary size, infrastructure and management team in place to thrive as a private equity (PE) sponsor’s first entry into a new market. A platform owner might transact to access capital for expansion while retaining a minority interest in the business, which can provide significant additional value if the business continues to grow under the partnership with the PE sponsor.
In turn, finding the right sponsor is key. That relationship dictates the future growth of the business because it’s not just about opening new locations, but also investing in IT infrastructure, quality assurance and employee development. Working in sync with a PE sponsor can sometimes increase the value of the retained minority interest beyond the initial majority sale.
For many clients, value can also include the benefits and fit for their employees and the people they serve — preserving clinical integrity, and maintaining their legacy. Additionally, it encompasses deal components such as representation and warranty insurance, and paid time off.
While sellers often focus primarily on the cash component, understanding value in a transaction involves much more than just the monetary aspect.
Why is it necessary to recast the financials?
In broader terms, recasting means eliminating expenses that a buyer is unlikely to incur or non-recurring expenses. For example, as a business owner, a typical expense many owners run through the business is a vehicle. That’s a standard personal expense that a buyer isn’t going to assume. Recasting takes that amount out of the financials and adds it back to the EBITDA or the profitability, which increases the apparent profitability.
I’ve seen anything from condos to wine cellars included. It seems straightforward to go through the financials and identify all those personal or non-recurring expenses that a buyer will not incur, but it’s critical to meticulously comb through and identify these expenses.
The key takeaway is that recasting can materially affect a business’s value because every expense adjustment affects the EBITDA, which is then subject to a valuation multiple. For instance, an expense of $1,000 with an 8x multiple equates to $8,000. It’s vital to identify all possible adjustments because they cumulatively affect the earnings, which are then multiplied by the valuation multiple to determine the business’s value.
It’s damaging if you miss these add-backs or adjustments, and it can also be harmful if you’re too aggressive with these adjustments. For example, claiming unnecessary key management personnel expenses or discretionary bonuses can be areas where buyers often push back. They may refuse to accept that a CFO isn’t needed or that bonuses aren’t essential, arguing against eliminating these costs from the financials. Being too aggressive can lead to a loss of credibility with the buyer, who may then distrust your financials throughout the rest of the process.
Being disciplined in your approach to recasting can help maximize the value derived from applying the valuation multiple to the adjusted EBITDA.
Should the owner be involved in the day-to-day operations as much as possible?
It’s really important to consider an exit strategy early, particularly the leaders on the bench ready to step up and take your place. If a buyer is under the impression that the business can’t operate without its owner, that’s a major deterrent. They’ll worry that critical aspects like payer relationships, referral connections and employee loyalty might falter if the owner is out of the picture. To mitigate this, it’s important to start identifying key personnel who can assume these responsibilities well before initiating the sale process. This allows businesses to demonstrate to potential buyers that other leaders, like Sally, Joe, and Bob, are capably handling operations with significantly reduced involvement of the owner.
Even if the owner is only working three or two days a week, showing that the business has a life beyond their presence will make a significant impact on the value. The only caveat is the owner’s ability to put their ego aside and accept that they’re not the top dog in the business anymore.
Should the owner pursue a sequential presentation process to maximize value?
No. [laughs]
A sequential process is when a seller puts together a list of potential buyers that they believe are the best fit. Sellers might have multiple buyers in mind for various reasons like their industry experience, financial capabilities or reputation. They then approach these buyers one by one, starting with their top choice. However, they might go through several unsuccessful negotiations as each subsequent negotiation fails and they move down the list. This approach is intended to limit market exposure and maintain confidentiality in an effort to prevent employees and other stakeholders from discovering the sale process. But it doesn’t always work in the seller’s favor.
The challenge with this method is that many unpredictable factors relate more to the buyer’s circumstances than the seller’s intentions. For example, a chosen buyer might be undergoing other acquisitions, facing financing troubles, or dealing with internal issues unknown to the seller — all of which can have a significant impact on the transaction.
Taking a more controlled approach by engaging a vetted group of qualified buyers increases the chances of finding the right buyer at the right time. I remember one instance where the winning bid came unexpectedly from someone who wanted the business because it was near his vacation home — a personal motive that provided top dollar for my client out of the blue. You can never predict what might drive a buyer to offer the highest value, and following a sequential process can limit exposure to those kinds of opportunities.
Finish this sentence: “In the behavioral health industry, 2024 will be defined by…”
…continued interest in mental health, new platform investments in autism services and a market ready to soar once the Fed introduces a rate cut.
Editor’s note: This interview has been edited for length and clarity.
The Braff Group is a mergers and acquisitions advisory firm specializing exclusively in health care services including behavioral health, home health, home care and hospice, health care staffing services, home medical equipment, pharmacy services and ancillary health care services. To learn more, visit https://thebraffgroup.com/wp-content/uploads/2024/06/1stQ-Update.FINAL_.pdf.
The Voices Series is a sponsored content program featuring leading executives discussing trends, topics and more shaping their industry in a question-and-answer format. For more information on Voices, please contact [email protected].