Buying a Healthcare Business? Top Warning Signs and Concerns: The Importance of Examining Financial Statements
This blog is part three of a multi-part series addressing the top warning signs and concerns when buying and selling a healthcare facility. You can read part one by clicking here and part two by clicking here.
When making the decision to purchase a health care business or facility, closely examining the financial statements is crucial in determining four important aspects for success:
- They can help determine a fair purchase price
- They can inform as to the business’ prospective profitability
- A Change of Ownership (CHOW) application requires a Proof of Financial Ability to Operate; they can show whether this business or facility satisfies this requirement
- They indicate if the business has misrepresented any financial information
What is a Fair Purchase Price?
The simplest methodology for valuation is the Fair Market Value method, in which the price of an asset is determined by what others would pay on the open market. However, because of the nature of small to medium sized healthcare businesses or facilities, such information is often not readily available.
If the fair market value is not easily determined, there are other methods that can be utilized. For example, you can use the annual profit to determine a fair purchase price, or you can compare the operation you are looking to purchase with the value of another similarly situated business. Our team of experts understands the difficulties in valuation and will guide you through your options.
Will the Business I Purchase be Profitable?
Many times, mismanagement of an operation can lead to a business being less profitable than it should be. Examining the financial statements can indicate where a business is overspending, underspending, or undercapitalizing.
For example, a business you are looking to purchase may seem highly profitable. However, upon further examination, you may determine that the business did not spend enough money on training its employees. Having undertrained staff may lead to possible tort liability in the future which could damage the profitability of the business in the long run.
A Change of Ownership (CHOW) Application Requires a Proof of Financial Ability to Operate. Will this Business or Facility Satisfy this Requirement?
When buying or selling a healthcare facility, the Agency for Health Care Administration (AHCA) requires that you submit a Change of Ownership (CHOW) application. You can read more blogs about the CHOW process by clicking here or clicking here.
As part of the CHOW application, AHCA requires a form called the Proof of Financial Ability to Operate. The Proof of Financial Ability to Operate requires estimated costs, sources of funding, projected revenues, a projected cash flow statement, and additional financial information. Much of this information can be derived from the existing business’ operations.
We regularly assist clients with CHOW applications and understand the intricate financial requirements posed by the Proof of Financial Ability to Operate. We will advise you as to the viability of your prospective business’ financial ability to operate.
Has this Business Misrepresented any Financial Information?
Without examining a business’ financial statements, a purchaser may unintentionally inherit a business which had previously engaged in financial misrepresentation. Such misrepresentations may constitute fraudulent activity.
Allowing our team to closely examine the financial statements of the business you are looking to purchase will significantly lower the risk of assuming any of these types of obligations through a purchase. We know how to analyze any flaws in financial information. As the age-old saying goes, always follow the paper trail!
Seek Experienced Lawyers to Guide You Through the CHOW Process
We always recommend seeking the counsel of an experienced attorney/accountant to examine the financial statements of a business or facility that you are seeking to purchase. Our team of legal experts understands the unique financial details of a healthcare business. In fact, we often work side by side with our clients’ accountants to provide a comprehensive approach to purchasing a healthcare business or facility.
Our team has assisted prospective business owners with this often tedious and complicated process. We are experienced in working directly with AHCA requirements, preparing the necessary documents, and meeting the timelines required. We will guide you throughout each step of this rigorous process and provide comprehensive advice along the way.