Making An Impact - Episode 4 M&A For Healthcare Providers

Neil Johnson of Lawrence Evans & Co. discusses how his firm can help healthcare providers evaluate their options when considering the financing needs of their business. We also speak to Neil about the Lawrence Evans Healthcare Capital Markets and Innovation Summit being held in Columbus, Ohio on June 2, 2021.

Transcript

SPEAKERS 

Jason Hare, Neil Johnson 

Jason Hare  00:02 

Hello everybody, my name is Jason Hare, and welcome back to Making An Impact. Again, thank you all for joining us on Making An Impact - a series of conversations hosted by Scioto Properties - that center in and around the disability community. Today we'll be talking mid-market healthcare M&A with Neil Johnson, Managing Partner at Lawrence Evans & Co., a boutique health care financial advisory and investment banking firm located in Columbus, Ohio. Neil has more than 20 years of healthcare investment banking and private equity experience, including the completion of over a billion dollars of corporate finance transactions involving merger and acquisitions, equity and corporate debt financing as well as distressed asset acquisitions and divestitures. Neil, it's great to have you. 

Neil Johnson  00:51 

Appreciate having me join on. Thank you.  

Jason Hare  00:54 

Living in Columbus, Ohio, is that where you're originally from? 

Neil Johnson  01:01 

No, actually, a cheesehead by birth born, in Wisconsin, but father was in automotive and ended up moving to Toledo-Sylvania, before finally heading to Detroit where I went to high school, and then college at a small school in Michigan. So kind of found my way down after getting into banking in the Detroit market. And finally coming down to a health care bond shop here in Columbus. Tried leaving to Europe, California, and ultimately found my way back... MBA at Ohio State. So now considered a Buckeye, and really enjoy Columbus. I think Columbus is like Austin and Nashville, just not as cool. But we're working on it. And, you know, making a name for ourselves with a lot of great healthcare organizations that work nationally.  

Jason Hare  01:53 

I couldn't agree with you more about Columbus. The first time I went out there, I was really surprised. And I love that city. I think it's super fun. And actually was just listening to something on NPR ...a few months back now. And they were talking to New York transplants who had moved to Columbus. And we're saying how it has kind of all of the amenities that they loved in New York, but it has that Midwestern nicety and enjoyment. So, yeah, there's a lot to be said about Columbus. So tell me about Lawrence Evans... Managing Partner, and is it a firm that you had started? Or how long have you been there? And what do you guys concentrate on? 

Neil Johnson  02:35 

I actually started Lawrence Evans, and company about 20 years ago with another colleague from, New York, and focusing on healthcare as I was, in healthcare finance. And we figured healthcare is not going away in our career, lifetime and ultimately started helping organizations raise money, help with evaluating opportunities, or potentially selling. So I've been doing this now for about 20 years, working nationally with various health care providers and service companies, everything from community hospitals, senior housing, post-acute home health, hospice, behavioral health, some physician groups, as well as a lot in the revenue cycle - health IT data, data analytics. 

Jason Hare  03:20 

When we think about advising for M&A, what does that look like? What does an M&A advisor do? And why should a provider or business consider using a firm that specializes in advising for mergers and acquisitions? 

Neil Johnson  03:40 

Sure, now, appreciate that. Yeah, we, we kind of play in that what we might call lower middle market, you might hear business brokers, we kind of play in that area, we're not the large, full-scale investment bank, you know, we're a small specialized group working nationally, out of Columbus used to have an office in Scottsdale covering a little more on the west coast, but our clients are typically up to no more than 200 million in revenue, and 10 million in profits. So a lot of them are entrepreneurs, owners have built a business trying to, you know, evaluate options or you know, need financing outside of just going to their, their local bank, you know, we help with complex situations. And you know, we're a professional service firm. That means essentially, you know, we're helping the owners, maybe buy out a partner, helping really finance out a bank or another situation that is challenging, maybe they're looking to buy a company, and so we can help on our buy-side, help evaluate and help through negotiations and contracts. Now we're part of the team or part of a... a team of professionals that should include your lawyer as well as your accountant. We can get into that but you know, there's, you know, professionals that have expertise in different areas. So, you know, your lawyer might be good on regulatory but have no transactional experience. So that could be troublesome. And so again, it's good to have a professional team as you evaluate maybe even tax considerations, we can get in about the potential tax changes that are on on the books that could be really will say detrimental to your net cash effect if you're considering taking some, some money out of the business or selling the business. So again, as part of the team, helping organizations evaluate those options. And so maybe like a business broker or investment bank, we work with those that are maybe single asset, multi-asset growing, have some troubles that maybe need to evaluate bankruptcy or other distress situations, we're looking to raise money to again, grow, acquire. And so our expertise focused in in healthcare, we think we do a good job and help understand the business owners' challenges and opportunities.  

Jason Hare  06:03 

Yeah, when you talk about the tax implications, it sounds like, there's a lot to think about now, especially if you're an owner. And... I know that there's been some discussion regarding capital gains, and if there's going to be a change to that, if you're an owner looking to sell, what were you referring to when you were talking about somebody looking to take some equity out of their business? 

Neil Johnson  06:29 

Sure, you know, organizations, owners, they may own the business, they may own the business in the real estate, they may just manage the operations. And so as you think about those three components, you can sell or finance each one of those individually, or separately. And then, you know, some, some people put the real estate into a separate holding company. And so you can sell that off or finance that or just pay rent, and there's different tax implications and, and legal, you know, risks with, with doing that the current potential pending tax change that the Biden administration is proposing moves long term capital gains from the 23.8%, which is the 20% plus the 3.8%. Additional Obamacare, Medicare tax, a lot of people are not aware of that has also imposed its 23.8%, potentially to as high as I believe, about 42%. So that's that is, is potentially a big change in what your taxable tax amount your tax bill is going to be. If you do something, after this year, it could be retroactive to 21. But right now, I mean, many are hoping to look at doing something this year, or at least taking some cash off the table. And then consider, you know, managing that risk from both a financial perspective of the real estate, the business, or just the wealth of their, their family that they've worked so hard over the last, you know, a decade or even, you know, 30, 40 years, we've seen in some cases. So it's okay to take some chips off the table, we always, you know, recommend at least presenting the options, you know, to the owners. I mean, that's what they, they hire us for. But again, taxes are very important, in a lot of cases, because it does affect how much your take-home is going to be.  

Jason Hare  08:30 

Yeah, it sounds like time is of the essence for analyzing this. And if you're going to make a move, to start getting a strategy in place, like you said, Get your team together, and start considering what that move is going to look like. And so I'd imagine that there's been a lot of owners and operators and providers that have read the tea leaves, seeing what's kind of coming down the pike. And I can only imagine that's increased the amount of transactions. So give us an update on what's going on in your world in that mid-market M&A world, and then also where you think it's going from here. 

Neil Johnson  09:11 

Yeah, I mean, right now is a unique position in time because there's currently about $2 trillion of private equity money sitting on the sidelines to be invested. Obviously, the behavioral health market with what we call the tailwinds of government spend into the sectors we see the need, I've got a niece that's autistic and seeing them move from Arizona to Rhode Island and the different you know, care that's available in different marketplaces and, and just this astounding number of children being diagnosed. So when you look at the market opportunity, the number of operators the fragmentation, the private equity industry looking to put money to work in these, these private equity investors,  they're getting money from the pension funds and the state funds and even hospitals to invest into businesses. And these are businesses.... and this is not to be confused with venture capital. Venture capital is more than a high-risk startup, typically businesses that are maybe not even generating a profitable profit or even revenue. And so they're looking for returns may be an excess of 30 to 50%. We're talking about private equity, private equity, or family offices. And I can define in further what you might hear of search funds or independent sponsors, which I'll get to in a second. But, you know, these, these organizations now are looking to invest into, you know, behavioral health, and mental health businesses, you know, we recently sold a behavioral health software company, you know, in a niche sector, understanding the business. And you know, with that, with all this money out there, interest rates are low, just valuations are really pushing further, but private equity, they typically like to see businesses that are generating at least 2 million in profits. And they're looking for returns, maybe high teens to even 20% annual returns. So again, giving you a perspective of the size and scope of what they're trying to target. Now, independent sponsors is... it somebody that in my case might be Johnson Capital, I don't have the money to buy the business, but I go to the, the, the entrepreneur business owner and say, Hey, we'd like to buy you. But, the owner doesn't know I don't have money. Now, I'll put a little bit of money in, but then I have to call the private equity group to get the money, but I want to tie the business owner up. So there's some risk there that I won't be able to get the money or get a deal done. You know, search funds. That's, that's where the business school and I've done some work with the Harvard entrepreneurship, where you graduate Business School, and you want to go out and buy a business and grow it, you don't become a consultant or a banker or accountant, you go buy a business. And now again, it might be Johnson Capital, I don't have money, just graduated from business school, I want to buy a business. So I may have some expertise in the area. But again, I want to actually run the company, I want to buy the company come in, and help run it. So you know, this confusion of who these people are, and whether they have money, as they're knocking on doors because they want to get what we call proprietary deal, they want to be able to talk to the business owners, they want to build a relationship there to build trust that they can transact. Plus, you know, we're a little biased, obviously, as an advisor, but we see a direct transaction, somebody's not working with marketing the business, they usually sell for about 30% below market. So with $2 trillion out there, you know, they're calling business owners sending letters direct because you know, they want to buy by the business, without any competition, they want to buy it at a cheaper price because prices are pushing up. So with the business owners don't know what valuations are, don't really have a competitive process... You know, it's okay to do that transaction, but just want to make sure you're aware, you may not have the best deal, and make sure that the stumbling blocks of working with somebody that doesn't have money, and causing really several months or so of uncertainty, while they try to struggle to get the money, you know, could be a challenge. So I just want to make sure that, you know, some of these terms, you, you're aware of the different types of money, or capital or buyers that are out there.  

Jason Hare  13:42 

Yeah, that's, that's a lot to consider. I mean, it seems that just that 30% alone, knowing that an owner could potentially be leaving that on the table, I would think is enough to have, to have that conversation to talk to somebody who can help you get your company ready for sale, and then also make it a competitive process. But then again, to weed through what, who the buyer is, and what they're bringing to the table. It's a lot to think about, it's a lot more than I was initially aware of. So... 

Neil Johnson  14:19 

So as you think about some of the names you might have heard in the industry, with the big, big financial names KKR, Bain, that are with writing big checks, buying into the industry, with their companies, you know, they use investment banking advisors on any of the transactions they work on. So why, why wouldn't someone with a business that works hard for their life, not hire a professional? And of course, you know, I suggest, you know, you hire a professional that has experience in the space. Understand, and from that standpoint, you need to consider you know, we charge a retainer and a success fee. And that's kind of industry standard. So if someone's willing to do it without some kind of retainer, now, I know, there's some organizations that may charge 50,000. I think for an entrepreneur, that's, that's inappropriate. I think somewhere more than that, you know, five to 10, maybe 20,000 is, should be more standard. But I would be a little leery of someone said, they would do it without a retainer, either there, they don't have the experience, or, you know, there's some other strings attached. So just buyer beware, with a professional that is doing it without a retainer. I mean, I understand, you know, you don't want to spend the money, you don't want to go at-risk. But from our standpoint, we need to make sure you're engaged, we want to make sure we outline the process because you can, you can drop it anytime you can leave it, there's no pressure that you have to do something, you know, we can spend six months working with you evaluating the options, getting down into legal documents, and then walk away we've had that happen before, may not be the right timing the right group. And there's no, there's no risk on the sellers. And they can ...they can leave the process at any time. 

Jason Hare  15:02 

And it seems like again, going at it alone, there's more than enough risk there without, you know, having somebody guiding them, and helping them through the process. And so tell me about ... 

Neil Johnson  16:26 

Many, many of our clients, they... they just don't understand the amount of time and commitment as they go through a process of the financial information or data that's required, where they're still running the business day today. So as you talk about, maybe considering getting something done ahead of some tax changes, and thinking about a process, it's always good to make sure it's some housekeeping in order, whether it's financial operationally, management team, even cutbacks on, on a facility building, so that, you know, it's up to,... up to, up to code up to standard so that you can have your we'll call it open house to prospective buyers, you know, within that. 

Jason Hare  17:08 

And this makes Yeah, this makes the whole process a lot more seamless. When you have the equity firms coming in, they're looking for something specific. So if you can set your business up to look attractive to them, and you have all of your ducks in a row, that's a part of the battle that is important to get done upfront. 

Neil Johnson  17:34 

Yeah, I mean, a couple of things, private equity is kind of maybe almost a dirty word sometimes where they think, oh, there's one make money, there's some good and bad players out there. So obviously, if you do want to work with private equity, you know, make sure the culture is there, you probably want to expect that selling doesn't mean you get a bag of cash and you walk away. But you probably need to sell and remain in the business, maybe what we call role equity, you know, some of your equity is moved into the buyer, and then you need to wait a couple of years, and hopefully, that money will grow and you'll get what we call the second bite at the apple. And so you just need to consider what does selling mean, and expect that it's going to take some time, it's not, it's not like selling your house, and you put it on the market and the hot market today, it's sold and you're out of there in 30 days, and it's a transaction you're done. This has been a maybe even a lifetime of building the business or a generational, and it may take a little bit of time to prep it to sell it and get all of your money out of the business and find the right partner too, and maybe the right partner isn't the right price. And I've seen situations that at the end of the day, the culture and partnership, you know, keeping the employees keeping the name is more important than trying to get the top dollar,  

Jason Hare  19:00 

Right.  

Neil Johnson  19:00 

So as I say, what is selling mean? entrepreneurs and owners need to, you know, really think about what they want to accomplish. And that that's important, especially if you want to have a legacy or what you know, what do you want out of it at the end of the day. And of course, you know, we're there to help at least evaluate the options. It's not our business, but we just want to make sure that they know their options, and that they can then execute on the one that makes sense to them. And we can all feel comfortable that, you know that makes sense and help it as smooth as we can to get the closing.  

Jason Hare  19:35 

Right. So you can at least tell them you've seen this before. This is a good option or this is market, you know this is something that is pretty standard and guides them along at least so that they know that this is something that traditionally happens rather than being blindsided. 

Neil Johnson  19:53 

Correct. And again, as a team with the professionals and sometimes, you know, maybe your attorney or accountant has been working with you, but they don't have transactional experience. That doesn't mean we can't work with them, but maybe, you know, bring in another firm to help with certain components of the transaction. Because you really want to think about being you don't want to be pennywise pound foolish when you're talking about some of the dollars of your family's, you know, wealth that you've worked on so hard. So again, it's prudent to make sure you have a good team, you know, going forward. 

Jason Hare  20:33 

You guys have a conference coming up? In June, right? 

Neil Johnson  20:38 

Correct. Yeah, it's our Healthcare Capital Markets Innovation Summit in Columbus, Ohio, and we're trying to, you know, bring in the real estate providers and early-stage innovation companies together within healthcare, to really, you know, the deal-making environment and networking. It's in-person and virtual, so an opportunity to network, learn some from some leaders in the industry today. And hopefully, you'll consider some transactions or financing if you need it. 

Jason Hare  21:17 

Love that it's in person, it's great to see that coming back. Who should... 

Neil Johnson  21:21 

Obviously, you still want to be cautious under the conditions but I think the way we've got it set up and stay could be wide open by then as well. We're offering a pool patio, networking options, people are uncomfortable, stream it to the pool, patio, and then the virtual setup with one on one meetings or virtual ballroom to network ... And I feel like we've got a great combination of this hybrid environment and offer that package to those that maybe can't travel or still uncomfortable with a bigger environment that we are having a limited in person.  

Jason Hare  21:55 

Yeah, I love that. So you guys, essentially had set three tiers almost, it's, for me, I'm fully vaccinated, thank God, you know, I was able to get the shot and now fully vaccinated. So I'm really looking forward to that in-person, you know, conference, if, if I was less comfortable, you have an outdoor option. And also if I'm more comfortable at home, and haven't been vaccinated, or just you know, want to can't make it to Columbus, you have the virtual, which I love that you guys seemingly have thought of a lot of different ways to accommodate people where they're at. And, you know, I'm looking forward to attending this, who do you think should attend this? Or who is this conference targeting? Or what would be a good audience?  

Neil Johnson  22:41 

Sure, and it's around, you know, the deal-making the money transactional within the healthcare again, you know, the real estate, the providers, as well as the technology or innovation. And, you know, I don't say innovation in technology, it's broader than that. But as many listeners today, you know, might be involved in real estate might be involved, you know, obviously operating a healthcare business, but then maybe buying technology using technology, maybe you have some investments into some innovation. And so we try to cover those because they are converging in today's marketplace, and private equity, venture capital, lenders, bankers, accountants, business operators, executives, are all, all attending the conference. And so we're excited to get everybody in, in place together to try to improve healthcare and lower costs and hopefully, create a better, better environment. And we started looking to do this last year and COVID obviously put the brakes on that. And I think in a way we've been innovative and trying to do this hybrid that will hopefully work out better for the future. We'd like to do it as an annual event. We have a charity golf tournament we're doing with at Top Golf the day before, so kind of an outdoor setup. We're supporting a charity, to make awareness and raise some money. So we're excited about that... Behavioral Health, Pediatric... Behavioral Health Pavilion at Children's Hospital, obviously, with COVID and a lot of the mental health issues today we think, you know, great charity, and awareness that want to support. So we hope, we hope, you know, people can join us, network, learn something. And you know, if you're interested in financing, selling your real estate, or looking to partner acquire, I think this is the place to go and especially in the Midwest and early on here as an in-person organization.  

Jason Hare  24:44 

It's a great meeting of the minds and if for anybody listening if you haven't been to Columbus, as Neil said, it really is akin to Nashville and Austin. It's just an awesome city. That's super clean, great people. And this conference is definitely going to be interesting. And I think it's going to be a great meeting of the minds. Well, you know, Neil, this has been a great conversation. And I really appreciate you coming and sharing your knowledge and your insight and telling us about the conference. And all together, we just really appreciate your time. 

Neil Johnson  25:22 

Thank you. And you can find out more about the conference at our website, Lawrence Evans dot com, or the conference website, healthcarecapitalmarkets.com.  

Jason Hare  25:33 

Perfect. Well, thanks to everybody who's tuned in to listen, we're gonna have a breakdown of this conversation and more information about Lawrence Evans and Co. uploaded to our blog at scioto.com. And you can also visit their website at Lawrence Evans.com. To learn more about the practice and the services that they offer. And while you're there, as Neil said, be sure to check out the upcoming Healthcare Markets and Innovation Summit. There's gonna be a ton of great information. As Neil said, If you can't attend in person, you can attend virtually, you don't want to miss it! And you can check out the Healthcare Summit right there from their website. Finally, make sure you sign up for our email list to ensure you're up to date on the new podcasts. And until next time, remember to make an impact with everything that you do. Again, I'm Jason Hare, have a great week. So long, everybody!