Selling Your Pharmacy Services Company?

There is one key factor that rises above all others to make or break a transaction, plus get advice that can net you millions later.

While there are many things we recommend that you consider doing in advance of a near-term sale—in the next 6 to 12 months, for example—one critical factor rises to the top of the list. Of course, you must conduct a mock due diligence to reveal any potential clinical or regulatory irregularities, and you should also develop retention bonus programs for key management and sales professionals. Furthermore, you need to focus resources on cash collection efforts to avoid leaving any excess working capital on the table, step up the sales efforts to insure no slippage of revenue growth during the divestiture process, and also begin lining up your advisors (eg, investment banking, legal, and tax)—just to name a few important considerations. But there is one key issue that has risen above all others in the recent past that can truly make—or break—a transaction, particularly in pharmacy services: getting your financial reporting in order.

Here’s why.

The recession that has gripped the economy for the past 2 years has had a marked impact on how deals are currently getting done. With buyers and lenders alike hyper-cautious about investing millions of dollars amid a still shaky recovery, a good transaction today is far more about managing risk than it is about generating potential “outsized” returns.

Accordingly, the margin—and tolerance— for error has become razor thin. And with it, the bar for what passes for acceptable financial reporting has gone up dramatically. No longer will a deal invaribly get done if a firm’s financial statements are reasonably accurate and representative of what a buyer can expect posttransaction.

Buyers and lenders alike are demanding near-perfection today— which is particularly difficult in pharmacy services businesses that often work with hundreds of pharmaceuticals with varying formularies that are being reimbursed under perhaps an equally daunting number of payer contracts, with varying rates and contract terms.

Not surprisingly, then, with extraordinary variation in the timing of inventory purchasing, drug dispensing, and final reimbursement, statements prepared on the cash basis of accounting are often unreliable and misrepresentative of a firm’s true financial performance. And for those providers that attempt to prepare more accurate accrual-based financials, these efforts frequently fall short.

Companies often lack the systems and training necessary to accurately match specific drug therapies and their payer’s specific reimbursement with procurement cost to yield an accurate measure of gross profit, which buyers are increasingly—and reasonably— relying upon to assess a company’s attractiveness, long-term profit potential, and value.

The Repercussions of Inaccurate Financial Statements are 3-fold

First, with even the best of financial reporting reflecting the application of accounting principles that are often discretionary in nature, know that in the hands of a buyer, the discretion goes to them. Accordingly, your numbers will never look better when “scrubbed” by a buyer for fear that a seller will demand a price hike. At the very best, they will come out the same.

More likely, though, if the task and control of creating accurate financials is ceded to the buyer, with accounting discretion at their disposal and purchase price (and negotiating leverage) hanging in the balance, the numbers will almost assuredly (and naturally) come out worse. This doesn’t make buyers bad. It makes them smart.

Second, the more work that has to be done to get your numbers in order, the greater the risk perceived by both buyer and lender. And with value a function of risk, as risk goes up, purchase price goes down.

And perhaps the biggest negative consequence of having inaccurate financials is the extraordinary amount of extra time it adds to the deal cycle. Time in which “unknown unknowns” can sabotage a deal or its value, such as the loss of a contract, a change in reimbursement, or an increase in drug cost, is a big negative to the process. So, if you’re thinking of selling your pharmacy business in the next 6 to 12 months, it is important to invest the time, money, and human resources to get the most accurate accrual-based financial statements possible. If you generate $20 million in revenues, or more, you might even want to consider getting an audit. You’ll never get a better ROI. SPT

Mr. Braff is president of The Braff Group, a leading investment banking firm specializing in the specialty pharmacy, infusion therapy, home health care, hospice, behavioral health care and social service, health care staffing, and home medical equipment market sectors. The Braff Group provides an array of transactional advisory services including sell-side representation, debt and equity recapitalizations, strategic planning, and valuation. The author can be reached at 888-922-5169, dbraff@thebraffgroup.com, and www. thebraffgroup.com.