Exit Strategy Considerations

The COVID-19 crisis may serve to change, accelerate, or delay your exit strategy

By Jeff Ostrowski, PT

As a result of COVID-19, most of us have been immersed in business strategy, law, banking, finance, operations, telehealth, people, and patients.

As you now look into the future, the purpose of this article is to point you to the issue of exit strategy.

Let’s start with the basics:

• An “exit strategy” refers to an owner’s plan to sell or transfer ownership (equity) of his or her business. For sellers, it is generally hoped that the earnings track record and brand strength will yield a sufficient asset value to produce cash for retirement and other uses.
• Buyers typically use a multiple of earnings to value an acquisition and make an offer. Other factors such as market share, payer mix, referral mix, and more can change the valuation. Then, of course, the negotiation starts and a “deal” is made. Not all businesses are sold with this methodology, but it is fairly standard. Some deals include a purchase of partial ownership, with methods to sell the remaining ownership at a future date.
• Typically, earnings are assessed by looking back over a period of time. This “look back” helps the buyer assess the predictability, stability and growth potential of the seller’s business. With that information, the buyer can project a fair return on investment in their valuation and offer. There are other factors that influence the earnings of a business. Among these are “adjustments”, interest, taxes, depreciation, and amortization.

A COVID-19 SCENARIO

Based on the above, you can see that if COVID-19 suppresses your earnings with a “look back,” the value of your asset may have changed in the eyes of some buyers, all other factors being equal. An owner who projected an exit strategy in the near future—at a targeted amount of cash proceeds—must now recalibrate. Using financial modeling, with available PPS resources and the help of your advisors, work backwards to plan your next steps.

For example, let’s say an owner was looking to exit in the Fall of 2020. The owner had a realistic asset value of $250,000 in mind. However, that valuation was based on earnings that did not include the distressed COVID-19 months. Now, the trailing earnings may include the distressed months, thereby decreasing the market valuation to something less than $250,000.

However, the owner still wants the sale to yield $250,000. By modeling it out, it becomes evident that the owner can no longer sell in the Fall of 2020, but must continue as owner for a longer period of time in order to get the earnings back to pre-COVID-19 levels. The amount of time your exit is delayed depends on your business recovery. To model your recovery plan, again, use PPS resources and consult with your advisors. In doing so, factor in all available information about the broader economic recovery and your unique situation.

Options to Ponder

• Because of future risk and lessons learned through the COVID-19 crisis, the time is right for you to join forces with a larger company. You seek stability, risk mitigation, growth opportunities, and perhaps some cash in hand now with the potential for more later.
• You decide to join forces via merger with other practices you’ve come to know better through this crisis. You maintain a proportionate share of ownership while mitigating risk, reducing stress, and increasing talent.
• You decide to change your exit strategy goals based on risk tolerance and work tolerance by lowering your asset value expectations and adjusting your lifestyle accordingly.
• You make changes to your business that bring in new revenue streams, which allow you to stay on your current exit strategy plan.
• You delay your exit. You develop and execute a business recovery plan to get you back on your earnings track.
• You are optimistic, opportunistic, and playing the long game. You have no desire or need to exit any time soon under any circumstances.

To be Determined

• Potential buyers may not factor in the distressed months of earnings in an offer.
• Buyers and sellers will negotiate creative deal structures to share risk and future upside.
• Buyers will look for growth opportunities in this time. There may be creative, mutually beneficial deal structures that are being developed and negotiated.
• Buyers may seek a discount on the purchase price to take on added risk and liability.

This article presents a basic overview of a complex topic. Sleep on it. Talk to your trusted advisors, partners, and spouse. There is no right or wrong answer. The decision you make is the right one for you.

Jeff Ostrowski, PT, is a shareholder in Excel Physical Therapy, based in King of Prussia, Pennsylvania. He can be reached at jostrowski@excelphysicaltherapy.com.