Preparing for health care M&A: Accounting implications and best practices

As decreasing interest rates release pent-up demand for transactions in the health care industry, organizations that fully understand the accounting and financial reporting implications can equip themselves to handle those complexities and strengthen deal outcomes.

In addition, meticulous preparation, thorough evaluation and proactive communication are essential for successful health care M&A transactions, according to Nick Ward, RSM senior manager and health care audit policy leader, and Danny Schmidt, RSM senior manager and health care senior analyst.

Ward and Schmidt joined RSM’s “The Audit Statement” to discuss the actions that parties of a transaction should take before and after a deal. Below the video is the checklist they outlined, followed by a transcript of their five-minute conversation, which has been edited for clarity and length.

Danny Schmidt: From a macro perspective, the Federal Reserve has had their long-awaited pivot to cut interest rates, and we believe that this is going to spur investment activity and unlock cash flows for organizations to invest in areas like health care.

For organizations that are looking to test the market a little bit and see what the M&A environment looks like, what can you say about the accounting implications?

Nick Ward: If you're looking to sell, get somebody from a due diligence firm to help on that sell-side valuation and maximize what your opportunities are.

Operationally, look at your fixed asset schedules, your contracts. Look at inventory, look at leases—not only from a process and procedure standpoint of how your organization operates and accounts for those transactions throughout a regular basis, but thinking about how you can get that schedule ready for your due diligence, get your fixed assets disposals cleaned up ahead of time. Because part of that transaction is going to be going through all of those components and reassessing for value. So you don't want to have to spend a whole lot of unnecessary time.

Additionally, you want to think through, particularly in the health care space, what are your accounting policies and procedures around your revenue cycle? That's an area that's unique to each health care company. But as an industry overall, it's very unique how you're looking at your allowances and your contractual adjustments.

So, ensure that you've got those policies and procedures documented with clear understanding so that as you go into the sell side of the transaction, you really are able to have one foot ahead to make that transition as smooth as possible.

DS: Let’s pivot a little bit to the post-acquisition. Once organizations have gone into the market, the transaction is complete, and the real work starts to begin, what should organizations be thinking about from a post-transaction perspective?

NW: Post-transaction, that's where really your accountants are going to get all into the weeds of everything. You think of the amount of documents that are going to be in your closing binders on those transactions—between legal contracts, equity agreements, incentive units that might be issued—all of that needs to then be evaluated not just from a transaction, but also from the accounting perspective. What does that mean from a structure, a reporting unit? Are there certain requirements of your debt, the timing of your audit and all those things that you're going to need?

DS: Yeah. Picking up the phone at the last minute is probably not the best approach when communicating with your trusted advisors in this area. And so, communicate early and communicate often, and that's due to time is money. And the cost to do business is substantially more expensive now than it was four years ago, eight years ago.

We're in a higher-for-longer operating environment, so using your advisors to help in these areas enable organizations to focus on their key strategic priorities and really focus on optimizing, enhancing their enterprise value.