It’s No Secret that Many Business Owners Are Retiring. Some See this as an Opportunity.
After 30 years in management consulting, Scott Whitt was ready for a change. With his background as a healthcare strategist, buying a healthcare business seemed like a natural next step.
He started casually looking online at businesses listed for sale. He also got to know a few business brokers and let them know what he was looking for.
“I made it clear that I was looking for something in healthcare, that’s stable with some upside. Something that’s probably going to pay about two and a half to three times cash flow,” he explained.
Plus, the owner needed to have a compelling exit strategy. “If two years later, they decide to go back in business and re-emerge as a competitor, that puts you at a very serious risk,” he explained.
Spotting His Diamond in the Rough – Recognizing the Right Opportunity
Three or four years later, he came across a clinical research company located in Greensboro, North Carolina. According to Whitt, Triad Clinical Trials stood out to him for several reasons.
“It was established and had been in business for 12 years. That was important because most new healthcare businesses simply fail. It takes longer to build a reputation, build clients, regardless of what you do. And, it was very, very profitable, with gross margins of 60 percent,” Whitt said.
In Whitt’s mind it seemed too profitable, explaining “In order to do that, you’re not making investments and you’re not hiring the best people you could.”
The current owner, a nurse practitioner, put most of her focus on the patients and customers. For years, she got by using low-wage, inexperienced staff and outdated systems. “I think she had grown the business to where it just couldn’t be done like that anymore,” Whitt said.
Considering its margins and cash flow, Whitt felt he could grow the business. With the right investments, Triad Clinical Trials could run more efficiently and at a higher level of quality.
It seemed like an ideal fit on every front. First and foremost, he knew the healthcare industry very well. He also had many senior contacts in the industry. Plus, it was an opportunity for his wife to join him in business. She had a long career in the State Department as a diplomat and was very comfortable working within the scope of government regulations.
After a few conversations, Whitt felt confident that the owner was truly going to retire and not come back as a competitor who might lure away his clients. While doing so would not be an easy task, eliminating worry of the threat was very important to him.
Greensboro, North Carolina
The broker representing Triad Clinical Trials had done a good job of vetting the company in terms of historical cash flow and growth, so the asking price seemed fair. Plus, the business was pre-approved with a local bank for an SBA loan. The bank even took it a step further and had the business appraised by an SBA certified professional, showing the asking price was very close to the selling price.
In order to make the purchase and still have funds for working capital, the Whitts used a combination of an SBA loan, a conversion of retirement funds, plus a large cash infusion from their savings. They considered having the purchase partially financed by the owner, but were advised against it.
Given his background, plus the details he had learned through due diligence, Whitt felt confident he could easily assume operations. Yet, it wasn’t long before he realized he had a bit of a learning curve. Had he had spent more time digging into the day to day operations and become more familiar with how clinical research businesses operate, he probably would’ve done better.
“You Can Never Spend Enough Time Understanding the Ins and Outs of the Business You’re Buying”
“The biggest mistake I made was not validating what the previous owner represented as a backlog – business that had already been committed and signed and it would be deliverable over the next two years, and really understanding the cash collection cycle. Both of those were wildly misrepresented and it really hurt us for the first 18 months,” Whitt explained.
Some clinical trials last five or six years, while others last five or six months. Payment isn’t received until after a patient visit is completed and all the data has been reviewed. Plus, larger pharmaceutical companies can take up to 12 months to pay. When they bought the business, its prospectus did not clearly state how many of the bigger ongoing trials were ending in the first year. As a result, the cash flow he thought he was buying for the first 18 months largely did not materialize.
“In hindsight, had I done a little more due diligence, I would’ve negotiated a much higher line of credit with the bank, knowing our cash needs would’ve been larger and I would’ve negotiated the price of the business down a little more aggressively”, Whitt says.
Overall, Whitt feels he made the right decision in buying Triad Clinical Trials. In fact, there were other competitors interested in buying it; he saw their bids in the business records. Plus, he hadn’t really seen another opportunity like that out there – and still hasn’t.
“Healthcare is a Great Industry – Nobody’s Getting Any Younger”
Since purchasing Triad Clinical Trials in 2016, the Whitts have made a number of improvements. They’ve replaced almost the entire staff twice with higher paid, better qualified workers. They’ve replaced the ‘old school’ ledgers with a new accounting system, and invested in new computer systems, with up-to-date software and security. Plus, they launched a sophisticated marketing program with a new website and social media presence.
Business is now looking up, says Whitt. “In fact, we’ve signed three contracts this month that will lock in a good chunk of revenue for the next four or five years and that’s fantastic. So, we’re looking at expansion plans. Do we buy another clinic? Do we buy another company like this and merge it together? Do I find an investor and build a bigger operation?”
He’s also points out that there’s big demand for Phase I, which make up approximately half of all clinical trials. These tend to be inpatient studies, requiring people to stay in clinics 2-6 days, just to ensure their safety and monitor their progress. “To purpose-build a facility for that would be a tremendous business opportunity for us,” he said.
The Whitts are also settling into their new lifestyle. “For the last 15 years, I used to travel all week and my wife would see me on the weekends. Now I’m home all the time and we work together 3 or 4 days a week. Our boys are older now and this has allowed her to re-enter the workforce. She handles all the compliance and regulatory piece of the business. It’s all gone very well,” adds Whitt.
Serving Their Local Community Through Patient Care
Triad Clinical Trials is located in Central North Carolina, a community that has never really seen the benefits of the economic recovery over the last 10 years. Many of their subjects tend to be either retired, disabled, or have several part time jobs – and they don’t have health insurance. In some cases, while they’re in a trial, the clinic becomes their frontline healthcare.
“They see our doctors and nurses, and if they need meds they can’t afford, we buy those for them. Many don’t have transportation, so we’ll get them an Uber to get back and forth. To me, that’s just hugely gratifying and one thing I didn’t anticipate,” he said.
“The work I do now is a very different experience,” says Witt as he reflects on his former career. It goes without showing how serving the local community can be one of the most eye-opening and rewarding experiences of being a business owner.