Home  |   Subscribe  |   Resources  |   Reprints  |   Writers' Guidelines

June 18, 2012

Attracting the Right Growth Partner
By Brian Berkin
For The Record
Vol. 24 No. 12 P. 8

The following scenario may sound familiar: Momentum has pushed your company beyond the start-up stage, and you want to capitalize on a growing customer base. But you’re not sure how to get to the next level—or how to pay for it. Do you boost sales and marketing to encourage organic growth? Acquire a competitor? Look for a strategic buyer?

Any of these phases, as well as many others in your company’s life cycle, may require the financial backing of an outside entity. But the right partner should not only create the capital structure you need to grow but also enhance company value by providing strategic guidance, specialized industry expertise, and a network of resources to support you wherever you need it most.

Having financed and built successful companies before, growth capital investors can offer a constructive “been there, done that” perspective on your most pressing challenges. And with the market for HIM industry solutions larger than ever, capital availability and company valuations are at all-time levels. According to Bain & Company, healthcare investments doubled from about $15 billion in 2010 to $30 billion in 2011, representing 15% of total global private equity deals.

What Investors Look For
So how does a middle-market company capture the attention of financial partners? At the highest level, investors are looking for business models with the most growth potential and sustainability. Consider the basic questions private equity firms ask when evaluating a company: Is there a big enough market for your solution but only a few top-tier providers interested, leaving substantial, profitable opportunities left to seize? If yes, then do you have the right solution and infrastructure to capitalize on that market opportunity? Finally, once you gain that market share, can you keep it?

Here are a few of the characteristics LLR Partners, a private equity firm that invests in middle-market growth companies in several industries, including healthcare services, looks for in HIM companies to identify strengths and weaknesses:

Provider of mission-critical solutions: Mandatory EHR adoption and the conversion of medical records create the need for supporting services such as scanning, imaging, auditing, coding, release of information, integrating technology, and collecting payments.

Because of its complex, labor-intensive processes, HIM is viewed by many hospitals as an expensive but essential function better performed by outsourced providers that can more efficiently track regulation changes, invest in the proper controls, and find and train the right staff to do the job. Outsourcing can also minimize expenses—particularly in the IT department—for providers faced with mounting budget pressures.

Strong management team: The old saying “it takes a village” holds true. The right mix of people on a management team is critical to effective growth. Investors look for a few key factors: complementary managers with a track record of success who are still hungry to build their companies over the next three to seven years; visionaries who understand where they are as a business today and how to capture new opportunities in the future; and operational experts who’ve mastered the ins and outs of the company. Balancing the latter two strengths helps set a company on the right track in both mindset and execution.

Recurring revenue model and stable customer base: Investors are focused on creating long-term growth. Low turnover in your customer base and multiyear contracted services help estimate what percentage of revenue is set for a certain period of time and make it easier to map out a feasible growth strategy. License-based models can render retention rates, projected revenue, and future needs much less predictable.

Opportunity to consolidate fragmented sectors: The government’s economic stimulus funding has prompted both new start-ups and consolidation among existing players. The result is many fragmented subsectors that may spread the available customer base thin, forcing providers to wade through options for the right solution. Companies that help consolidate the market can become a single, valuable resource to providers and establish a stronger foundation for long-term growth.

Committed team willing to grow: To support a growth plan, midsized companies often need to enhance management teams and scale their IT infrastructure, sales force, or other departments. It is critical for investors to partner with a strong CEO and team who recognize their weak points and are willing to commit the time and resources to strengthening them.

Cross-selling opportunities: Can you get in the door with one great service and then extend that customer relationship by offering additional value? Even if your core solution is one of the best in the industry, being a one-trick pony limits growth potential and leaves you vulnerable to competitors. Consider what other services an HIM director needs. Can you deliver those by expanding organically or through acquisitions?

Acquisition pipeline: Speaking of acquisitions, one of the primary areas in which growth capital adds value is supporting the purchase of competitors and/or complementary services. Even if you have only one offering today, demonstrating a well-thought-out acquisition and integration plan demonstrates that your management team is thinking strategically about where and how to grow.

A Success Story
LLR Partners has invested in healthcare services for more than 12 years. Most recently, it partnered with IOD Incorporated, whose organic growth and acquisition strategy demonstrates many of the characteristics previously described.

Already established as a leader in release-of-information (ROI) services for hospitals, IOD had a vision to be a more diversified business. Leveraging growth capital and LLR as a strategic business advisor, IOD has expanded into several other complementary services over the past two years. It now sports a full suite of HIM solutions to help healthcare organizations overcome workflow challenges, including document conversion, ROI, coding, auditing, abstracting, and ICD-10 transition. IOD’s management recognized a growing need for hospitals to outsource several key HIM processes to one trusted partner and committed the resources to expanding the company accordingly.

Choosing the Right Partner
It can be equally complex for growth companies to determine which source of financial and strategic support is the right cohort for them in the long run.

According to BDO, a financial advisory organization, private equity firms with more than $80 billion of capital view healthcare and biotech as holding the greatest opportunities for investment. With so much attention on the space, it is crucial to connect with partners that can point to deep healthcare industry experience and professional networks, attributes they’ll need to differentiate your company from the pack and help set it on an achievable path to success.

In a highly regulated industry such as healthcare, it is also imperative that a financial partner has experience dealing with reimbursement and regulatory challenges. Many investors just getting into the space do not have an appreciation for the levels of reimbursement threats that can make or break a business, potentially putting the companies they advise at risk. It is beneficial to have a partner that can react to regulatory changes with composure and offer advice on how to handle them based on relevant experience.

Reference checks on interested investors can shed light on a prospective partnership. In addition to hearing success stories, ask for CEOs of portfolio companies that faced major challenges to learn how the investor handled tough situations. Take a look at how your business plan aligns with what proven financial and strategic advisors have seen work in HIM. Through a partnership built on trust, experience, and shared goals, together you can successfully navigate the next steps in your company’s growth.

— Brian Berkin is vice president of LLR Partners.