5 Critical Transaction Issues for Hospital CFOs
Since transactions are often once-in-a-lifetime deals for hospitals, executives may question what is the most important for them to bring to executive discussions. Here Mark Bogen, senior vice president of finance and CFO of South Nassau Communities Hospital in Oceanside, N.Y., and Rob Broermann, CFO of Sentara Healthcare in Norfolk, Va., discuss five key issues that a CFO should be prepared to provide insight on for a thorough and successful transaction.
1. Finances. As the financial expert of the hospital's executive leadership team, a CFO needs to be able to advise the other executives and the hospital board on all relevant financial situations during a hospital's M&A process. This includes negotiations and discussion of fair market value. "The CFO is the chief numbers person and should lead the evaluation of fair market value. [In addition], the CFO is usually involved in direct negotiations. This could be restricted to the financial aspects of the deal or could be a much broader negotiating role," says Mr. Broermann.
The CFO should also be prepared to provide an evaluation of a potential partner's access to capital. This involves analyzing whether the partner can provide capital improvements, pension funding and support for malpractice issues. "The CFO should assess how partnering with another hospital would impact access to capital. Does the hospital have the capital and the debt capacity? In addition, does it have the cash flow to support your hospital?" says Mr. Bogen.
2. Due diligence. The CFO should play a major role in the due diligence process, ensuring that the process is robust and that any issues are thoroughly evaluated. "In my role as the chief 'numbers' person, I focus of controlling the risk of the organization by ensuring that we base our financial decisions on sound logic and reasonably conservative projections. I do this by ensuring that we carry out a robust due diligence process," says Mr. Broermann.
"It is important to remember that due diligence goes both ways. Under most circumstances, a hospital should conduct an evaluation in line with due diligence just as the potential acquirer or partner would. It is important to know that and to communicate that to the other executives," says Mr. Bogen.
3. Debt. In order to properly educate the other executive leaders, a CFO should be knowledgeable about various debt structures as a result of a merger or sale. For instance, a CFO needs to consider a potential partner's debt in its financial evaluations because in some transactions, a hospital can become part of an obligated debt group, especially when joining with a larger health system. According to Mr. Bogen, when a large health system acquires a hospital, they may realize that the debt structures of each hospital in the system are strengthened in a group setting. "They could create an obligated group, which refinances reach hospital's existing debt. If something were to go wrong financially for one hospital, another could become responsible or obligated to carry that one hospital's debt. Obligated groups are becoming more popular across the country, especially in the non-profit sector," says Mr. Bogen.
4. Strategy. A hospital CFO also needs to consider the strategic initiatives of its hospital and the potential partner. "You have to be looking at the potential transaction with a critical eye," says Mr. Bogen.
Mr. Broermann agrees. "There are several potential roles for the CFO. Since the CFO is a member of the senior leadership team, he/she should be weighing in on the evaluation of the potential transaction from a strategic standpoint," he said.
5. Culture. Mr. Broermann and Mr. Bogen both emphasize cultural fit as an element for a CFO to consider during a transaction, even though it may not be a CFO's wheelhouse. "In my role as a general member of the senior leadership team, I focus on culture and strategic fit. I would recommend that if the cultures of the partners are not a match, encourage your organization to walk away," says Mr. Broermann.
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