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Healthcare Advisory Partners is not a primary lender and is not an investment banking firm. However, we got our start in the healthcare finance industry and we are intimately familiar with the healthcare finance market. We know every lender that specializes in healthcare services and we understand industry underwriting criteria. Thus, we know how much financing any provider can qualify for and we know which transactions are financeable and which are not. Call us today to learn how we can use corporate finance to facilitate your strategic plan.
Asset Based Financing
For most healthcare service providers, the primary form of asset based financing that is available is accounts receivable financing. Some providers own real estate that can be financed and some providers have enough inventory to finance, but the vast majority of healthcare service providers are limited to accounts receivable financing because they have no other significant assets on their balance sheets that can be pledged as collateral. Generally speaking, the maximum cash advance for a line of credit collateralized by accounts receivable is 80% of the eligible accounts receivable that are outstanding for 150 days or less. While this may be adequate and appropriate for operating expenses and incremental investment in growth, it is usually not sufficient to finance the acquisition of another company.
Cash Flow Financing
A cash flow line of credit is collateralized by the cash flow of the borrower and/or acquisition candidate, as measured by EBITDA. While accounts receivable financing is available to just about any provider with eligible accounts receivable, cash flow financing is reserved for well established companies with good credit and a minimum size. Typically the minimum size for a cash flow line of credit is $2 Million in EBITDA and the maximum credit facility is 2.5 – 3x EBITDA. So, while cash flow financing is common for mergers and acquisitions, it is seldom sufficient on its own to finance a transaction: Even with available financing, every buyer should budget a significant amount of cash in order to consummate a transaction.
Recapitalization
A recapitalization is a form of financing that leverages the company as much as possible. Accounts receivable, cash flow, and every other asset of the company are usually pledged as collateral for a recapitalization. A recapitalization is a significant transaction that yields the maximum amount of cash that any lender is willing to advance to any particular company. Recapitalizations are used for major investment projects, to fund succession in a family business, or to finance a change of ownership. Depending on the nature and purpose of the recapitalization, it can lead to an immediate change of ownership, gradual change of ownership, or no change of ownership at all. Although recapitalizations are appropriate in a wide variety of circumstances, they are usually the financing vehicle of choice for private equity groups to acquire platform investments.
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