Getting in Shape for a Healthy Exit

If you took the temperature of the allied healthcare sector this year, it would indicate that it’s ‘heating up’. Physiotherapists, podiatrists and chiropractors operating solo / group clinics with an annual turnover between one and twenty million dollars are all increasingly attracting the attention of private equity firms and listed entities.

The timing of this trend could not be more fortunate, as many of these practices are being run by baby boomers who are also on the precipice of retirement. With very few health professionals aged in their 20s and 30s in a position to access the capital required to take over these businesses, private equity firms and listed entities are stepping in to provide the once in a lifetime exit opportunity.

Private equity firms and listed entities are underpinned by their ability to raise capital and buy up these practices at scale. By consolidating staffing and automating systems through technology, such as implementing online patient bookings, these firms can deliver efficiencies which then allow them to be valued at over eight times the business’ normalised earnings. For the seller, this means they can afford to pay up to five times the business’ normalised earnings.

Undertake a financial check-up

With such a significant nest egg at stake, it needs to be said that selling to a private equity firm or is a listed entity is not a DIY affair.  This will be one of the most critical commercial decisions in the life of the business and should be entrusted to an experienced financial advisor who can leverage the most from the deal and ensure the rewards of exiting are reaped well beyond the owner’s last day in the office.

If you are an allied healthcare operator wanting to exit, the most effective preparation begins at least six months before the target sale date, but optimally, planning would begin even a couple of years in advance.

The financial records need to be in order so that a private equity firm can conduct due diligence with ease. Annual financial statements and monthly management reports – which are generally required to be provided for the past three years - should provide sufficient detail to allow the potential acquirer with the ability to undertake their due diligence and the figures should be able to be substantiated in a prompt manner if any queries arise.

Reduce personal involvement in the business

Many practice owners believe an established brand with a loyal clientele and a positive balance sheet is all you need to be alluring to a potential buyer. However, nothing is a bigger turn-off to private equity firms than a business that still requires the owner to pull 50 to 60-hour weeks to be profitable. Private equity firms want to know the practice is sustainable - without you. If you’re working two / three days a week in a high-level management role, then it’s a lot easier to sell.

Upon sale, you might be paid to stick around and continue working in the business to facilitate the transition between owners – generally this would be in the vicinity of a three year period from the time of sale.

For a professional who has built their practice from the ground-up, this can be a difficult mental transition and requires some forethought of how it may be handled. You need to be prepared for the business to evolve to fit a set corporate operating model and a set structure, which may also require retrenching valued staff. It can also be challenging to negotiate the loss of control and being an employee, rather than a boss.

Increase profitability

For some allied health businesses, there will be a n opportunity to increase the profitability of their business before it’s ready for sale. Generally, most purchase offers will be based primarily on the most recent year’s profitability.

At Moore Stephens, we can help review your operations and books to identify the opportunity for improvement. It may be as simple as renegotiating the terms of an existing lease to bring it into line with the industry standards or even moving premises. Industry benchmarking will also provide guidance as to whether each category of expenditure is in line with industry standards – for example, you may realise that your employment costs are too high relative to your patient fees and a headcount reduction may be required.

Take advantage of tax concessions

Small business owners may be able to reduce or even eliminate the capital gain which they earn on the sale of their business provided that they satisfy the eligibility conditions for the small business capital gains tax concessions.

The small business capital gains tax concessions may also provide the opportunity for small business owners to contribute $500,000 per person to their superannuation fund from the proceeds which they receive following the sale of their business with this amount being independent of their ordinary contribution caps and not influenced by their existing member balance.

Structuring your affairs to ensure that you satisfy the eligibility conditions for the small business capital gains tax concessions often takes time and effort and Moore Stephens can help in structuring your affairs appropriately.

A memorable exit

A buy-out offer can result in the business owner receiving an up-front cash payment with an equity interest in the acquirer to provide an incentive to facilitate a smooth transition of the business. It’s a lucrative proposition and an opportunity that should be maximised as much as possible to give your future the best bill of health.