Healthcare Tech Firm Has Compelling Software and Chronic Cash Flow Challenges
G-Squared Partners began working with a healthcare technology client that we will refer to as "HomeMedTech" (name changed) four years after the company's founding. The firm sold an app providing daily monitoring for patients suffering from chronic obstructive pulmonary disease (COPD).
When a given day's responses deviate from a patient's normal baseline, an alert triggers a healthcare professional to contact the individual; based on that outcome, the patient's doctor can modify a prescription, schedule a visit, or take another appropriate action. The system offers clear benefits, as healthcare providers and insurers can see a substantial reduction in costs related to COPD for patients who use the app.
Despite the product's compelling value proposition, HomeMedTech's financial situation was challenging, and the company suffered from chronic cash flow problems. The founders and principals of the company are doctors and software engineers who have little (if any) background in or intuition for managing the financial aspects of a business. (It's worth noting here that this situation is the norm, not the exception, among G-Squared clients).
Focus on Cash Flow, Forecasting & Metrics
When we started working with this client, we knew we had to determine the source of their cash flow problems, but before we could do that, we had to clean up their books.
The company maintained records on a cash basis – as such, we converted them to accrual-based accounting, produced GAAP-compliant financials for prior periods, and put a suitable accounting system in place. Next, we needed to identify where their cash was going. Management had never prepared a cash flow forecast and had no concept of the business's key drivers of profitability. They had not compared the relative merits of the different revenue-generating scenarios for each channel through which they might sell the service (i.e., hospitals, medical groups, and insurers).
We built a multi-year forecasting model that included various revenue scenarios (best case, worst case, and most likely, among others) to provide them with a tool to gauge their performance and use as a basis to raise additional capital. We also developed a set of key performance indicators for HomeMedTech's management so that they could regularly assess trends and measure progress on a timely basis. We established a monthly reports system to proactively identify how closely revenues and expenses tracked the budget to get away from a bumper-car style of running a business that careens from one unanticipated result to another.
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Solution: Raise Capital, Guide Corporate Governance
After building the solid foundation needed to evaluate the company's financial health, it was clear that HomeMedTech needed more capital – both as a cushion to support the business and when revenues and expenses were mismatched to support growth. We introduced them to an angel investor, who invested in the company, and we also assisted management in completing the next two rounds of financing.
Subsequently, we assisted management in completing a subordinated debt financing with a resource whose participation was meaningful not only as a source of capital but also as a "stamp of approval" to the broader community. Adding a carefully chosen debt level to the company's capital structure lowered their overall cost of capital without diluting existing shareholders. Overall, in this phase of the relationship, we took on the "quarterbacking" responsibilities of a quality CFO, bringing in various players as needed to execute a strategy
Separately, we provided guidance with respect to numerous aspects of corporate governance:
- Helping to set up a board
- Providing advice on adding outsiders to the board
- Structuring board meetings.
- Explaining the need for keeping accurate minutes of board meetings
- Creating board presentations
- Obtaining proper consents
- Working with outside counsel
- Assisted with LLC "members meetings"
Bottom line: we coached the CEO on how to "avoid getting in trouble," which is crucial once you have accepted other people's money
Successful Sale Yields Win-Win Scenario
Almost four years had passed since we started working with HomeMedTech. The company’s customer base and revenues were growing, and they had more capital than when we had started working with them, but they continued to be cash-strapped.
We showed them that they would either have to raise significantly more capital or sell the business. We jointly decided to pursue both paths simultaneously and developed a high-level strategy that would allow us to identify the best potential investors and suitors. Working with management, we assisted in forming a group of transaction advisors to pursue a transaction.
All of the work we had done from the beginning, including preparing GAAP-compliant financials with supporting documentation, identifying KPIs, etc., was essential to running a smooth due diligence process – this is our modus operandi with all clients. Within a few months, the company received a significant capital investment proposal and a buyout offer. We helped the principals to evaluate both while they chose the buyout, which included a three-year earn-out.
The transaction closed in a little more than six months.
How an Outsourced CFO Positions Firms for Successful Transactions
The acquiring company was so impressed with the breadth and quality of what G-Squared had done; they decided to retain us moving forward to help them with their overall business. They described the schedules we created as “exactly what potential investors or buyers want to see” and that G-Squared partners were a “treasure chest of information.” They also noted that the quality and level of detail gave them confidence that HomeMedTech was a professionally managed business (which can help boost an offer price).
After the closing, the CEO sent G-Squared a thank-you note saying, “We couldn’t have done what we did without you.”
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