Why Buyers Look At Compliance Before They Buy Your Practice With Daniel Hirsch



Why Buyers Look At Compliance Before They Buy Your Practice With Daniel Hirsch

We have the one, the only Daniel Hirsch, Risk and Compliance Analytics. Daniel, a good friend of mine, has been on the show a few times. He's one of the guys that I like to talk to about compliance because he doesn't try to scare you. He tries to help you make some money. Speaking of money, we're going to talk about something that I think is interesting. It’s how to cash in and make sure that you factor in all of the compliance work before you go to sell your practice. This episode is going to be action-packed compliance talk from Daniel Hirsch. Daniel, take it away. What do we need to know about selling our practice?

All right. Thank you, Adam. Thank you for having me. We could go the scaring route I wasn't planning on doing that but everyone else does it, so we'll let everyone else have that route. We have a really good topic for that we could speak about for many hours, but we're going to highlight details that you could take away and use immediately. We will also clarify and articulate how and why for this topic, regardless. It's obviously for the buyers but if you're the seller too, this is going to be really valuable for you.

Buyers Assess Risk Before Revenue—And Compliance Sets The Baseline

When it comes to compliance, most owners think they start with the revenue. You're always evaluating the company. Don't. Buyers assess risk before growth all the time. They want to make sure and it's not sexy. We know that compliance is one of these things where you got to have it. You got to do it. When it comes to compliance issues, they don't just lower the value, they change the deal terms.

When you're considering how to approach compliance, it really determines the viability. Compliance issues, they could just stop a deal. It could just completely stop the deal before you even look at financials. They're important. The numbers matter, but the compliance components really will ultimately stop any kind of deal from going forward. It also sets the risk baseline. Buyers assess from a regulatory exposure first to understand where are the liabilities. Where are they? If you don't know that ahead of time, you don't want a surprise.

Obviously, Adam, when it comes to like other components, if it's marketing or operations or HR or front desk, there's a lot of wiggle room involved. With compliance, you don't want a surprise during a deal. It also drives the diligence scope and cost. If you have weak compliance, that just triggers a deeper dive, a longer investigation, more expensive due diligence. It just compounds.

You may think, “Maybe I'm just going to squeeze by. I'm not going to get a lot of questions.” All of a sudden, a certain can of worms is opened up and you're not prepared. It could be not just money, but your time and energy. People have to consider that that is what is going to really impact how you survive a deal. If you're not willing to put in the time, if you're not willing to put in those weekends or evenings to actually answer these questions or go through diligence, it's very important that you have that sustainability.

It also signals from an operational discipline standpoint, strong compliance suggests that you have systems and that you have controls. Regardless of how large you are, they want to know is there leadership in place. One of these things you need to know, how fast this is going to happen. The impact of clean compliance could accelerate how a buyer feels from a confidence standpoint, or it could shorten the transaction timeline. I guess, Adam, the main takeaway from this concept overall from entering a transaction is, buyers are not looking for perfection. I say this all the time. I’m not perfect, you’re not perfect. We’re not looking for perfection, but they're looking for control and really predictability. That's what they want.

I love how you said that because buyers are picky. Buyers probably have money. They have money. That’s why they’re buying. Money isn’t necessarily the most important thing to them at this stage. It’s how can I continue to grow my money risk-free? I think about compliance and I think about it’s like this little sliver of awareness in most of our brains. We don’t think about compliance very much. At least I don’t and it’s not that big of a deal. From the way you’ve painted it like, it’s just these very simple routines to keep your practice in order but it can make a big difference for you whenever you’re going to evaluate your practice.

It’s becoming more and more apparent to me that essentially, buyers, when they come in, they want to be able to buy an asset that prints money for them without them having to solve any more problems or have any more headaches because they already have headaches. If you don’t have a good compliance program, then they’re basically buying a headache and that devaluates the business.

Compliance Maturity Directly Impacts Valuation & Deal Structure

It's true. Speaking about headaches, from a valuation standpoint or even like a deal structure standpoint, you could have two companies, my company, your company, we could have the exact same EBITDA, but they'll have very different valuations based on the compliance maturity. You don't want to discount uncertainty. The cleaner compliance profile, it's built into what they're looking for. Your point of they just want to invest. Investors are looking to invest to grow their money. That's very true.

When it comes to really determining how much the purchase price is paid, the compliance strength often decides whether proceeds are either it could be cash, it could be deferred. You could have tighter covenants, you could have long survival periods, you could have broader reps. All these things impact not just a number. It impacts the actual deal. It could drive escrow size or duration. All these things, if you're a seller, you're not really considering. You're just looking, "Am I going to get that multiple?" the answer is, hold on. It really depends on what you've done on the front end that will pay dividends, I think, when you're going through that transaction.

Compliance uncertainty also makes earn-outs really hard to achieve and it's easier for buyers to dispute it. It's all about leverage also. When you're thinking about this, when you're going through that process of how are you leveraging when you're going through a negotiation, the sellers with really strong compliance programs or just an awareness of their compliance, you could push back on assumptions and restrictive terms.

That's your leverage that a lot of times people are thinking, "The numbers don't lie." when you have a process in place and you could prove that, by the way, this is repeatable, this is something that could be sustained and grow because it's protected, that's ultimately what is going to differentiate between you and someone down the street also when you're going through.

That’s exactly where I was going. What a way to easily differentiate yourself. If you’re gearing up for a sale, it’s like you know most of the people that are in this group, they’re 1 to 3 clinics, maybe 5 to 7 clinics is like that mid-tier. We probably don’t have our compliance in order as much as we probably should. Let’s be honest.

That’s okay. The truth is people that have known me for over a decade know it's a process. It's not just the goal to be, "I'm compliant, I'm not compliant." you got to start somewhere. Even with auditing. I could care less what you did. It's what are you doing now? Are you showing something meaningful to say, "I'm identifying this and I'm going to make sure that," again, from what people look at in due diligence, you mentioned documentation maybe, or coding and billing. For consistency or red flags, you have to be able to hold up through scrutiny.

How do you do that? How are you describing your CPT utilization or time-based coding accuracy? Not just coding, but about your time-based coding. Are they accurate? How often are you billing re-evaluations? Are you just doing it on the clock every 30 days? The answer is, I hope not. It really depends, but you have to really be able to describe and defend what you're doing. Even from a documentation integrity standpoint, are they reviewed? How are you going through this? For credentialing, I think HR, I always get nervous credentialing, supervision, licensure not just to rattle off a million things, but supervision rules these really matter.

Are you following? I've seen deals that they were at the eleventh hour, they did not close because of supervision issues where you may think, "Okay, well that's not a big deal," but it depends what state are you in. Are you following your rules? Do you understand what those rules are? When it comes to payor mix and contracts terms, those are really boilerplate. It's not that complicated. Any lawyer could pick that out, but you want to make sure is it sustainable? Is there exposure or a long-term exposure to unfavorable clauses? You want to know. To your point, if you have a small mom-and-pop clinic, you want to know what that is. What are you going into? What are you offering before you actually open that door and say, "Okay, I'm ready."

Buyers also test whether written policies are actually followed and operational. I can tell you I do this often. You'll ask, "Where is it? How does it work and can you explain?" The process of what you say you have, is that reality or is that just, "I asked ChatGPT to quickly create something for me." That's not going to fly because you have to pass the scrutiny of, “By the way, I'm not just going to read it, but I'm going to say, let me interview some staffs. Do they understand? Do they understand how it flows in practice?"

I know I mentioned supervision, but it also goes to unlicensed individuals too. Techs, aides that also is heavily regulated. I can tell you, Adam, the do not get on that list, OIG list, from an investigation standpoint, it is always with aides and techs and it's always with unlicensed individuals either claiming to be or it's from just a dollar standpoint. The penalties are significant for these types of cases where people are abusing certain positions. It's one of these things that, again, goes back to policies. Do you even understand how the workflow is with certain unlicensed individuals? Also, with maybe are you over-relying on a certain payor or a referral source or based on where your location is?

All these things really matter that you should be saying, "Okay, well what is my percentages?" And I'm sure you go over this with some of your clients where you want to know, are you not bulletproof, but are you able to sustain, let's say, your major referral all of a sudden retires? What are you going to do about that? How does that work? How does that impact your value?

When & How To Prepare: Compliance As An Ongoing, Practical Process

The number that I’ve heard is five years. If you’re five years out from thinking about selling. If your thoughts are that you might sell within the next five years, you probably should start working on this stuff now. I never really considered the compliance aspect, but usually, what we look at is like more around the financials and getting your contracts in order and all those things. I would assume compliance is a big part of that, too. That five-year audit process where you’re really just going through your practice, making sure you’re buttoned up on the compliance side. When practices come to you and ask you like, "When should I start thinking about this," what’s the timeline like? Is that the five-year mark what you recommend or do you recommend something different?

I typically don't give an actual year or time. It's almost like when you evaluate your patient. You're automatically thinking, “How am I getting this patient to discharge?” When you're opening up, what does the end look like? It doesn't mean that it can't be 6 years from now or 20 years from now or 6 months from now. The answer is you should have a plan in place. I'm in the compliance world, which is great because I'm able to say, "You know what, this may be meaningful to me, but it may not be meaningful to you or someone down the street."

The answer is, is this appropriate for you? That's the question you always have to ask. You're not being compared to the publicly traded companies. You're being compared to you and what is reasonable for your practice. If you can do that meaningfully, that could be a simple two-year process. That could be six months. It goes back to what I said before. If you're not taking something, a meaningful step now, that's the challenge. That could be simply saying, "I need to open communication lines. I need to be able to have some anonymous reporting." That's going to cost me about $100 a year. Why not just do that?

I need to audit my charts. Let me do that. Or maybe use AI to be doing that. There are great tools right now, there's great technology that can do this for you. It could just simply be a gap analysis or an IT risk assessment. All these things, there are so many great things to leverage that you could apply to operations and traditionally, I think, Adam, a lot of people shied away from compliance to say, “It's annoying. It doesn't really help me. It's not practical for what I'm trying to do.” That was true for the last 20, 30 years. It wasn't effective.

And that's why I'm here talking to you to let people know that it really should be. It should be integrated with operations to say, "Where's my risk? Is this appropriate for me? How do I stay within the boundaries?" This is what I need to do to actually make an impact, to add value. If you could do that from a five-year standpoint, forget EBITDA. You'll be in a really great position to be able to say, “Year-over-year growth, that will speak for itself.”

When it comes to how knowledgeable your staff are, all it takes is one weak link to have a breach. The idea is, are you educating your staff? It's really easy to do that. You could go on MedBridge, you could go on a lot of different platforms to get training, but are you? Are you actually doing it? Are you signing up those employees on basic things for your practice?

I know buyers are really more concerned with that unknown risk than really just the managed risk or last-minute fixes. That just reduces the trust. Compliance doesn't kill the deals, but surprises always will. You don't want that, "By the way, we're closing on Tuesday," and the answer is, "No, we're not. Look what we just found."

I really appreciate the time. We’re going to make these short and action-packed. We’re going to do fi five episodes of this. Next time, we’re going to be talking about cash-pay services. Before you start launching your cash-pay services, what are some of the compliance considerations that you might want to think about? Daniel, thank you for your time. Daniel has a lead magnet here for you like. There are some free resources there. Check out Daniel if you want to have a conversation with him about compliance. Thanks.

Thanks, Adam.

Important Links

• Risk and Compliance Analytics
• Book A Call With Nathan
• PPO Club LinkTree