Q: Why sell? Aren’t they just buying me with my own earnings?
A: Yes, they are. That’s how all profitable businesses are bought – based on a multiple of “EBITDA” (earnings before interest, taxes, depreciation and amortization, which is essentially cash flow); therefore, you would only sell if you are getting “prepaid” enough of your anticipated future “earnings” – ie, if the multiple is high enough.
Q: What is a standard multiple?
A: There is no standard multiple, although the most common range for smaller transactions would be about 2-3 times the trailing twelve months’ EBITDA (2-3x TTM EBITDA). PRG through its unique MSO model has and can get the sellers double-digit multiples.
Q: What changes the multiple?
A: The multiple is greatly affected by perceived growth potential, synergies, risks, and deal size, as well as competition and overall market conditions. If great growth potential is obvious, use of TTM EBITDA does not take growth into account, and therefore the multiple is increased to adjust. Conversely, in an industry where reimbursement is declining, the multiple gets squeezed. Further, it as many resources (time, legal and due diligence expense, etc.) to do a $1 mil transaction as it does a $50 mil transaction, and private equity firms have to maximize the amount of invested capital in order to make money; therefore, bigger deals carry much greater value. Especially in personal service businesses, potential loss of the selling owner is a huge risk in a small deal (like a single clinic). Finally, the number of potential suitors impacts the multiple via simple competition – businesses sell for higher prices in an auction than they do in one-on-one negotiation.
Q: When is the multiple high enough?
A: The answer is purely personal. If you only intend to work 2 more years, then a 2-3x looks great. Each seller must make that determination based on his own needs, risks, and goals. Here are some key considerations:
· Taxes: in general, your earnings are taxed at ordinary income rates, with the marginal federal rate being somewhere around 35% for most sellers; however, sale proceeds are generally taxed at long term capital gains rate of approximately 20%
· Time Value of Money: stated simply, a dollar today is worth more than a dollar next year (even absent inflation) because it can be invested and earn interest
· Industry Consolidation: as health systems and mega-groups continue to acquire medical practices, they will tighten control over referrals outside the system – can you stay in the game?
· Reimbursement: do you project that you will be paid more or less per visit in 5 years?
· Politics: How likely is a nationalized, single payer system (ie, Medicare for all)? How likely is it that “free” healthcare for all will require lower reimbursement and access? Is an ACO or capitated plan a big profit driver for you now? Those models are what the government is already relying upon to reduce expenses/utilization, and one can only expect that continued expansion of those models is in our futures. How likely is it that taxes will remain the same or be decreased, as opposed to 70% or even 90% as some politicians have proposed? No matter what either party says, we know the truth -- someone actually has to pay for all this free care.
· Inflation: Despite decreasing reimbursement, one would expect practice operating costs, especially labor, to continue escalating, shrinking profit margins.
Q: How can one quantify the foregoing?
A: We have created a simplistic HOLD vs SELL ANALYSIS to help you compare the effects of sale vs simply continuing to earn what you currently earn. This analysis is over-simplified in that it projects that the status quo, ie, what you earned over the past year, will continue indefinitely into the future (despite all the risks noted above). The final line shows the “break-even number of years” before holding is equal to selling now. This analysis is available upon request.
Q: What is Premiere Rehab Group, LLC (“PRG”)?
A: PRG is a Florida limited liability company formed by Rich Hoffman, for the express purpose of aggregating like-minded owners of therapy clinics through an MSO model who want to explore sale of their clinics to a single buyer within the next 12 months.
Q: Why shouldn’t I just sell myself? I’ve already had some potential offers.
A: A therapy business that does not dominate its market or offer a “platform” opportunity will likely command only about a 2-3 multiple, and then only from the buyer that has picked you. PRG is organized to attract national players in a competitive process controlled by PRG for the mutual benefit of all of its clinic owners.
Q: Who will own PRG?
A: Only those owners of therapy clinics who want to explore sale of their clinics within the next 12 months are being invited to join PRG. Ownership will be based upon relative trailing twelve months (TTM) EBITDA of participating clinics, as reasonably established by a 5 member Board of Managers to be elected by the clinc owners.
Q: How will PRG be formed?
A: PRG will act as a holding company for the various subsidiary existing therapy clinics of the participating owners. The owners will contract to exchange ownership of their individual clinics for membership interests in PRG MSO. Members will be able to opt out of PRG prior to ceratin mutually agreed upon deadlines. If an acceptable Purchase and Sale Agreement is not obtained within one (1) year of the last deadline, PRG will be dissolved and ownership of all clinics will be returned to the original owners without further commitment or obligation. During PRG's interim operation of the participating clinics, profits will continue to be tracked by clinic and allocated to the clinic owners (i.e., the owner who contributed the clinic into PRG will be allocated its profits [and losses], such no one will be in anyone else's pockets).
Q: What operating functions must be integrated?
A: PRG will require each clinic to (i) use same EMR; (ii) same software for billing, collection and revenue cycle management; (iii) adopt a common accounting platform; and (iv) adopt a common HR platform for all employees. Through the integration process PRG and its back-office functions will capitalize of enconmies of scale and pass those savings onto the PRG members.
Q: Why should we integrate any functions?
A: PRG is aware a buyer will require this level of integration to treat a potential purchase as a single transaction, as opposed to 15-20 simultaneous, individual small transactions. Further, transitioning clinics on a single operating platform will be much less work for a buyer. Both factors and through our experience will enable PRG to command a much larger multiple.
Q: How will PRG find a buyer?
A: PRG has engaged on its team an experienced legal counsel and an experienced investment banker (with combined transactions of almost $3 Billion in healthcare deals) to create an auction process for the potential sale of the clinics. Based on prior experiences, PRG anticipates interest from as many as 80-100 potential buyers.
Q: How long will this whole process take?
A: Usually about 6-8 months. Timing will depend upon how quickly PRG can aggregate therapy clinics having the necessary combined EBITDA within the desired geography, how quickly those clinics can integrate operating functions, and how quickly the PRG Board of Managers can agree upon the most attractive buyer.