Client Profile
A private equity-backed healthcare provider specializing in rehabilitation services for musculoskeletal and neurological conditions. We have supported this Client on its platform investment and multiple subsequent roll-up acquisitions ranging from $10 million to $70 million in transaction size
Target Business
The Target operated more than 50 outpatient and on-site physical therapy clinics and provided contract rehabilitation services hundreds of hospitals, inpatient rehab units, long-term care facilities, and industrial worksites across numerous U.S. states.
Situation
During diligence, we encountered several operational and financial complexities that impacted both the reliability of the financial statements and the forward-looking performance of the Target:
- High Turnover at the Executive Level: The Target had undergone significant leadership turnover, including the CEO, CFO, COO, and Controller. The newly appointed management team lacked detailed historical knowledge and could not respond effectively to several key financial and operational inquiries.
- Non-Integrated Practice Management System: The Target utilized an internally developed practice management system that was not fully integrated with its financial reporting software. The sole developer of the system had departed prior to the diligence process, leaving gaps in knowledge and documentation around system functionality and reconciliation practices.
- Entity Complexity and Ownership Structure: The Target maintained multiple legal entities, including several with minority or non-controlling interests, which created challenges in consolidating results and appropriately calculating EBITDA on a post-close basis.
Solution
We employed a targeted diligence approach to isolate core business performance and assess transaction risk:
- EBITDA Adjustments: Reduced adjusted EBITDA to reflect the business disruption caused by corporate-level management turnover and the associated transitional risk to the organization’s leadership continuity and operational stability.
- Practice Management System Review: Conducted detailed testing procedures to validate revenue and patient activity data from the practice management system. Reviewed significant balance sheet accounts and performed a search for unrecorded liabilities to establish the reliability of reported financial performance.
- Normalization for Ownership Interests: Removed all minority interest EBITDA contributions to appropriately reflect post-close consolidated earnings, ensuring an accurate financial basis for the Client’s valuation and structuring decisions.
- Customer Reimbursement and Contract Risk: Identified risks tied to customer reimbursement arrangements and service contracts that could materially affect future revenue. Recommended additional customer-level diligence and that key contract terms be addressed in the final purchase agreement.
Outcome & Impact
Our diligence enabled the Client to:
- Obtain a clear and normalized view of the Target’s true operating performance.
- Understand transitional risks related to leadership turnover and gaps in financial reporting processes.
- Account for minority ownership and ensure valuation aligned with consolidated post-close earnings.
- Address and plan for potential revenue volatility stemming from reimbursement contracts.
This insight empowered the Client to move forward with deal structuring that reflected both performance normalization and identified business risks.
Value Delivered
- Delivered a normalized and lender-ready quality of earnings report despite limited historical insight from current management.
- Validated revenue recognition and operational metrics through independent testing of a proprietary system with limited internal expertise.
- Helped the Client assess risks related to systems, contracts, and management continuity—leading to a more risk-adjusted purchase price and deal terms.
- Provided actionable insights for negotiation points in the purchase agreement and post-close integration planning.
