Value creation is the key goal of any business. The definition of value creation is the process of adding value to your company by offering a service or product that provides the solution to your client’s problem as well as meeting and exceeding their expectations. According to Edward de Bono, guru of strategic thinking, “Companies that solely focus on competition will ultimately die. Those that focus on value creation will thrive.”
Creating value for your clients helps to sell your services (or products). It is not simply increasing shareholder/owner wealth, but also enhancing client, employee, vendor, lender, and community value.
Operating your business in this value creation mindset positions your company to be at its most valuable when you decide to exit. Buyers optimally seek a company to acquire that has both an increased free cash flow and growth rate, while also having a decreased company specific risk.
Below are examples of activities that can increasing free cash flow:
- Fast-track cash collections
- Lower Accounts Receivable collection period
- Sustain lower levers of inventory
- Lengthen supplier payment terms while seeking price competition
- Consider leasing vs. purchasing
- Automating redundant tasks
- Incorporating software applications and tools
- Rightsizing staff while implementing motivational incentives
- Investing in total quality management
To increase growth rate, you can undertake these actions:
- Maintain dependable and consistent revenues
- Capitalize on customers changing needs by constantly reinventing the business model
- Predict and respond to future market undercurrents by adding new income service lines
- Focus on core proficiencies and outsourced non-core activities
- Regularly review referral sources to ensure satisfaction of current sources and add new ones
- Regularly seek out opportunities in underserved sectors
- Rely on vendors and other partners to help add value
- Benefit from changing or emerging demographics
- Invest in developing brand identity
- “Awe” clients consistently
The following are ways to decrease company specific risk:
- Reduce owner dependence
- Provide key employee succession paths
- Hire a salesperson
- Require all employees to sign non-compete/non-disclosure agreements
- Avoid customer/supplier concentrations
- Furnish accurate, prompt and transparent financial reports
- Update the marketing plan to regularly indicate changes in market dynamics
- Reduce company liabilities
- Improve diversification in all areas: customer base, geography, revenue sources, andsuppliers
- Create a corporate culture that motivates employees, catches the attention of new clients, and boosts the effectiveness of managers
In an ideal world, you would create the most value for your firm by addressing all these areas. In reality, we see very few companies that are this prepared when it is the moment to sell. Here are a few key points that will help ensure the highest market offers in your sector:
Clear, Concise Financial Statements
When the time comes to sell and list your business, you will provide 3 full years of financial statements (profit and loss/income statements and balance sheets). If you are selling several months into the year, you’ll need to furnish year-to-date reports as well.
There is nothing more unclear than an income statement containing unexplained Uncategorized or Miscellaneous Expenses. Review your profit and loss detail report for each period to ensure everything falls under the correct category and is clearly defined. Your balance sheet should be devoid of defunct items such as prior company-owned vehicles or paid-off loans (either company owed or owed to the company). You may need to ask your bookkeeper or accountant for assistance.
Tax Returns
Initially, you’ll only provide the last year of tax returns filed. As a transaction progresses in due diligence, the buyer will request a minimum of 3 years. You will want to ensure that your financial statements are filed promptly and that they accord with the financial statements provided.
Selling Motivation and Your Role in the New Organization
Every buyer wants to hear why you want to sell your business. It could be as simple as it is time for you to retire or, perhaps, you own other business ventures that need more attention. In addition, are you seeking to fully exit, or do you want to stay on for longer than a transition period to work with a salary and incentives for the new majority owner?
If you plan a swift exit, there is less risk for the buyer when you can demonstrate that you have stepped back from the business by placing key, trained employees in place who have valuable relationships with important clients, referral sources, and vendors. In other words, when you leave, you are not taking a good portion of the value creation with you.
Contracts/Agreements
Buyers like contracts since they imply stability and less risk. In-network insurance provider contracts are highly favored over out-of-network relationships with insurance companies, even if you find the out-of-network revenues to be more lucrative. The more contracts, the better.
Do your clients/patients sign a contract or agreement for services or products? This demonstrates more of a commitment than having a handshake arrangement.
Buyers prefer the company they are acquiring to have signed employee non-compete and non-disclosure agreements. That being said, as of April 2023, 2024, the Federal Trade Commission (FTC) issued a final rule that bans most non-compete agreements for workers in the United States, including senior executives. The rule was intended to take effect on September 4, 2024, but there is high expectation that there will be legal challenges that could delay or prevent its enforcement.
Referral Sources
Strong and satisfied referral sources represent the value created in your company. Periodically reviewing those relationships and constantly adding new sources to the mix ensures diversification and no surprises. Buyers will want to know the sources of your referrals and the percentage of total revenues, services, etc. each type represents.
Diversification
Diversification throughout the business indicates less risk. If you have one or two clients that make up a high percentage of total revenues, losing that client could very well negatively impact your business. The same goes for referral sources and suppliers. If you rely on any one of them too significantly, especially because you have so few with which to work, this imperils your organization.
By keeping these value creation elements in mind while operating your business, you will have created an interesting acquisition opportunity for multiple buyers. As Albert Einstein stated, “Strive not to be a success, but rather to be of value”.
This article was written by Michelle Albanna, Managing Director at American HealthCare Capital. If you are interested in speaking with Michelle about selling your healthcare business or learning about healthcare opportunities we have for sale, you can email her at michelle@ahcteam.com or call (760) 206-8088.
