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Newsletter – December 2018

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Behavioral Health: Industry Consolidation and Innovation Is on the Way

John DeLorenzo, Director, CFO Consulting Partners LLC

According to the National Alliance on Mental Illness, 43.8 million people in the U.S., or approximately one in five, suffer from mental illness. Approximately 60% of those affected are not treated, in some part due to a shortage of mental health providers as well as a shortage of available insurance coverage. The result is a significant increase in the use of emergency services for behavioral health issues. The National Council for Behavioral Health reported during a recent three-year period there was a 42% increase in the use of emergency services for behavioral health. By the time a patient reaches emergency services for their condition, it is likely that the condition is much more severe than if they had received treatment earlier. That said, the availability of coverage for behavioral health issues is improving due to a law enacted in 2010, the Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA), which made insurers offer no fewer benefits to an individual for mental health treatment than for physical health treatment. In 2014, the Obama Administration widened the scope of coverage through the Affordable Care Act (ACA), by making mental health coverage a requirement for insurers.
As a result of improved insurance coverage, the number of individuals with behavioral health coverage is increasing at a faster pace than there are services available to treat them. Furthermore, the need for behavioral health services is increasing significantly due to the opioid crisis and other drug and alcohol addictions, in addition to the increased prevalence of learning disorders appearing in children such as ADHD and autism. According to the National Alliance on Mental Illness, in 2014, $221 billion was spent on mental illness compared to $135 billion in 2005 according to Health Affairs. Expenditures are expected to rise to $281 billion in 2020 according to The Substance Abuse and Mental Health Services Administration (SAMHSA).

Based on the increases in those seeking behavioral health services, the industry is ripe with opportunities for consolidation, aggregation, and innovation.

Due to the shortage of behavioral health providers, the sector is going to need to rely on technological innovations such as aggregation of data to identify and head off behavioral health issues before they become more complex behavioral issues or result in comorbidities. For example, patients with diabetes have a higher rate of depression and therefore those diabetic patients should be identified and observed for potential depression. The ability to aggregate data to identify patients with possible behavioral health issues early on will hopefully lead to treatment before the illness becomes a more complex problem. Another significant technology opportunity includes digital therapeutics, where software is utilized to provide cost-effective treatment, thus reducing reliance on costly live providers and side-effect prone drugs. Other areas of digital therapeutics are games and other digital tools; aiding children with ADHD or individuals with less severe behavioral health concerns including insomnia, anxiety, and stress. Employers have expressed interest in treatments to reduce stress amongst employees and appear ready to pay for that service.

Another area of investment in the behavioral health space is utilizing technology to scale. The most significant barrier to mental health treatment is access to trained providers. There is a mismatch between supply and demand in rural areas. There are opportunities to develop telemedicine applications so that clinicians who specialize in specific behavioral health issues can connect with a broader population of patients; helping solve the low supply problems. This can be deployed live or in a prerecorded video format to rural areas or places like prisons.

Additionally, significant investments are being made in computerized tracking or in other words, automated workflows. The technology is centered around utilizing algorithms to determine when real-time intervention is required, alerting technicians to implement critical treatment in a timely manner or in anticipation of a negative behavioral health event.

The ability of the healthcare industry to serve the growing demand for behavioral health services in a cost-effective and efficient manner will require new ways to address the distribution of care. Primarily, we expect to see an increased aggregation of providers, deeper integration of services both within behavioral and general health, as well as a significant technological investment to optimize the deployment of service.

All of this provides significant investment opportunity with the potential for healthy returns for private equity investors interested in the healthcare space.

CFO Consulting Partners’ healthcare practice is here to help you, as we are focused on provider practices and technology, particularly in behavioral health. We can assist private equity to prepare a practice consolidation or technology acquisition/investment strategy. We are also available to help technology companies in healthcare with their growth strategies and fundraising.

Biweekly Newsletter- Fraud

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Following up our last biweekly newsletter on the roles of the board of directors, we will be focusing this newsletter on fraud prevention. Fraud is defined, by Investopedia, as “an intentionally deceptive action designed to provide the perpetrator with an unlawful gain, or to deny a right to a victim.” When a firm has poor internal controls, fraud can become rampant.

Below are multiple articles related to fraud prevention:

-All business owners may want to take specific measures to improve their internal controls in order to protect their firm from fraud. KPMG conducted a fraud survey and a government agency released an article about internal control practices that are helpful for preventing fraud, titled “Top Ten Internal Controls to Prevent And Detect Fraud!.”

-The risks of fraud are often underestimated by clients of consulting and accounting firms. Xero published an article, titled “Fraud Prevention Tips for Your Small Business Clients.”

-Many employers assume that, with increasing technological advances in the security sector, petty fraud (e.g. fake checks, phone scams, etc…) are becoming an issue of the past. In Frank Sorrentino’s article, “The More Technology Changes, The More Fraud Stays The Same,” he explains how these old-fashioned forms of fraud are still prevalent.

By Peyton Wille, CFO Consulting Partners

Biweekly Newsletter- Roles of the Board of Directors

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Below are multiple articles related to the roles and responsibilities for boards of directors:

-As time progresses, the challenges faced by boards of directors are constantly changing and directors are forced to adapt to these new responsibilities. In the article, “How Boards of Directors Are Reshaping to Meet New Challenges,” Christopher P. Skroupa, the author, interviews Tom Manning, a board director, about how he adapts to these new challenges.

-The article, titled “The Changing Role of Directors in a Globalizing World,” speaks about one of the specific changes that impact Boards, modern globalization. The article covers the Salzburg Global Seminar, where the role of the director, in an increasingly globalized world, was discussed.

-The board at nonprofits is often filled with very reputable seasoned business leaders, which would help less experienced professionals that join a nonprofit Board reap a plethora of benefits. Wayne Elsey published an article, titled “Seven Reasons to Serve on a Nonprofit Board“, pushing people to serve on nonprofit boards and explaining the wide array of benefits.

By Peyton Wille, CFO Consulting Partners

Biweekly Newsletter- Outsourcing Trends

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Following up our last biweekly newsletter on cybersecurity, we will be focusing this newsletter on outsourcing trends. Currently, more and more sectors of companies are being outsourced.

Below are multiple articles related to outsourcing trends:

-Greg Digneo, wrote an article, titled “Business Process Outsourcing: 7 Trends to Expect in 2018,” that provides hypotheses about expected trends for business process outsourcing companies. Of the seven trends he discussed, one that I found very interesting was that BPOs are becoming more transparent which in turn is beneficial for the relationship between the BPOs and vendors.

-To look at the future of outsourcing, the company, Flatworld Solutions, recently published an article, titled “Future Outsourcing Trends for 2020.” One of the interesting future trends that was mentioned in this article was that as more businesses move towards the use of cloud storage, companies will be outsourcing this need.

-Earlier this year Anna Frazzetto wrote an article, titled “Outsourcing In The New Normal: Three Trends Reshaping The Global Industry” that discussed three interesting trends in modern outsourcing. The three trends leading to an increasing number of outsourcing that were discussed was the fear of being penalized by the government, a need for bleeding-edge skills, and the rise of referral power.

By Peyton Wille, CFO Consulting Partners

Newsletter – October 2018

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Why Does it Take So Long to Close?

Paul Karr, Director, CFO Consulting Partners LLC

This question gets asked at companies of all sizes and industries. Legacy processes and systems, combined with growth in scale and complexity of the business and often multiple sets of accounting principles, are some of the reasons for this. In this article we suggest some ideas on how to address this challenge.
People, processes and systems are the three key elements of any finance function.   Each of these elements impacts the closing process, but the theme of this article is leveraging existing resources to see how the closing process can be improved within the context of the finance function’s existing resources.
Why start with the process, rather than implementing a new system, reorganizing or hiring personnel, or making other changes? For one thing, it’s more cost effective than making other, potentially expensive changes, particularly before the potential of the existing process has been fully realized. Also, implementation of a new accounting system necessarily requires focus on getting it done on time and on budget, which are obviously important objectives but take the focus away from process improvement, despite best intentions. The result can be automation of a suboptimal process, sometimes known as “paving the cow path.”
So where does one start the process work? We offer the following areas and suggestions for your consideration:
  • Closing period. Measure the days from the end of the accounting period to when the last journal entry has been booked and the financial statements have been prepared (the closing period). Not the day everyone wanted to be done, or should have been done, but the actual last day. If there are separate GAAP and regulatory financial statements and the timelines are different, they should be measured separately. The point of defining the closing period is to look at the true performance of the process as it exists today.
  • Closing activities. The activities during the closing period can be thought about in the following general categories:
    • Drivers of last entries. Having laid out the timeline(s), the next issues to explore are what the last entries are, and why they happen when they do. Dependence on information from operations or other functions outside of accounting may be a factor here.
    • Timing of activities. Further analysis of closing period activities can be done by putting them in the following buckets: (1) what can be eliminated (through standardization or other process improvements); (2) what can be done before the end of the accounting period (such as planning, estimates, some audit procedures); and (3) what can be done later.
    • Account reconciliations. These are sometimes done late in, or after, the closing period. This timing can lead to late entries, unnecessary differences between GAAP and Regulatory or Statutory Accounting Principles, or between parent and subsidiary financial statements, and concerns for top management, auditors and regulators. This timing is often seen as the result of resource constraints, but it can also be driven by issues with the reconciliation process itself and unavailability of timely data to perform the reconciliations. These process and data issues need to be addressed, but a quick way to address timing is prioritizing account reconciliations based on risk and performing lower risk reconciliations on a rotating basis and/or at non-peak times.
  • Documentation. Roles and responsibilities are usually not as clear as people assume. Even if they were clear at one time, changes in personnel and in demands on the process can create significant, undocumented changes that may need to be addressed. Also, a question that can be asked here is, “would a new employee know what to do?”
  • Calendar. This needs to be sufficiently specific not only to know who is to do what and when, but to be able to measure whether the closing process is on track.
  • Pain points. There is a great opportunity here to ask everyone in the process what’s bugging them, from those providing the input, to those doing the accounting, to those using the products of the process. Everyone loves to do this! The only imperative is, once all the stakeholders have been debriefed and all the issues are on the table, it is important to do something about those issues, and be transparent about what is being done and when, even if some action is deferred.
We hope some of this resonates with you, and you see some opportunities for “quick hits” that can help build confidence on the part of your staff that process improvement is achievable. We can help assess your closing process, tailor an improvement program and manage the resulting improvement projects to successful completion. Please let us know if you would like to discuss.

Biweekly Newsletter- Cybersecurity

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Following up our last biweekly newsletter on entrepreneurship, we will be focusing this newsletter on cyber security. Cybersecurity is crucial to all firms, but is often overlooked by small to mid-size companies.

Below are multiple articles related to cybersecurity:

-Many people hear horror stories of extreme data breaches, yet few people are doing anything about it. In Christopher Mele’s article titled “Data Breaches Keep Happening. So Why Don’t You Do Something?” he discusses why many people have still not taken the initiative to prevent data breaches.

-Many small companies do not place a strong emphasis on cybersecurity and treat it merely as a small part of the IT department. Andrew Rinaldi discusses the steps small businesses should take to protect their company, in his article titled, “The Small Business Case for a Culture of Cyber Security.”

-Some states have added laws that require state agencies to complete a cybersecurity assessment every couple of years. Zack Quaintance’s article “Unrelenting Threats Inspire a New Model in Texas” explains Texas’s new cybersecurity bill.

By Peyton Wille, CFO Consulting Partners

Biweekly Newsletter- Entrepreneurship

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We are going to begin to send out a biweekly newsletter on various topics that relate to business, accounting, finance, etc… Within these biweekly newsletters, we will provide links to interesting articles that pertain to each newsletter’s topic.

The topic of for this newsletter is Entrepreneurship:

-During our current digital age, some fear that entrepreneurship has grown increasingly difficult. Rhett Power speaks about the increasing amount of passion and determination needed for modern entrepreneurs to achieve their dreams in his article titled “Is Entrepreneurship Getting Harder? 5 Ways to Be Successful in the Digital Age.”

-One part of entrepreneurship that no one likes to speak about is when it becomes necessary for the entrepreneur to drop the business after countless hours of handwork. Caitlin Kelly shines light on this occurrence through multiple case studies in her article titled “For Entrepreneurs, a Tough Moment: The Pivot.”

-For the final article, Jamie O’Banion, a role-model to young female entrepreneurs everywhere, provides her own personal success story in her article titled “The Boss: Jamie O’Banion Is About to Sell $100M in Beauty Products.”

By Peyton Wille, CFO Consulting Partners

Newsletter – August 2018

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If You Like Physician Practices: You will Love Veterinary

John DeLorenzo, CFO Consulting Partners LLC

Following our introductory article introducing our healthcare practice, we followed up with an article that discussed the changing dynamics of physician practices.

As we serve our clients in healthcare practices, we are seeing significant opportunity within the veterinary practice area. This article titled – If You Like Physician Practices: You Will Love Veterinary, will tell you why.

While there are some larger corporations leading the consolidation of vet practices, think Mars, NVA (National Veterinary Associates) Blue River and VetCor, they generally target groups that have had some level of consolidation already. Mars targeted some of the larger consolidated groups such as Blue Pearl, Pet Partners, Banfield and VCA, while consolidators like Blue River out of Chicago will target individual hospitals. Groups like Veterinary Practice Partners and Community Veterinary Partners, both in Eastern Pennsylvania, will invest in and co-own practices with current owners.

While private equity has been active in vet consolidation, they are also investing in the consolidators, leaving early stage consolidation to others. Earlier this year Oak Hill Capital Partners, Harvest Partners and Cressey & Company recapitalized VetCor. Morgan Stanley Global Equity Partners invested in Pathway Partners Vet Holding. In 2017, Summit Equity sold NVA to Ares and OMERS and KKR invested in Pet Vet Centers. NVA and Pet Vet Centers valuations were rumored at EBITDA multiples of 13-15x while the Mars acquisition of NVA was at 18.2x according to bankers.

According to Forbes/Merger Market, smaller hospital acquisitions are fetching 8-10 multiples while smaller single practices in less desirable locations are getting 6-7x. A typical larger vet group can have EBITDA margins in the area of 15-20%, with smaller practices 7-18%. According to Simmons Veterinary Practice Sales and Valuations the industry average is 10-12%.

So, what we are learning? The vet business is healthy with an industry average of 10-12% EBITDA margins. Consolidators can acquire practices in the low to mid-teens multiple range, while growing margins as a result of creating a consolidation platform to 15-20% while increasing the valuation multiple as well. This is a recipe for good returns for investors while providing significant exit returns for sellers.

Also, it appears that the competition for buying opportunities is easier than that of physician practices as vet practices are in an earlier stage of consolidation than physician practices with the absence of hospital competition that exists in the physician practice area. Also, people love their pets and are willing to pay for more complex procedures that continue to develop in areas such as orthopedics, neurology and oncology.

While the vet business still has some of the “professional corporation” regulatory issues faced by physician practices, there is significantly less liability, payor issues (Medicaid, Medicare, private payor), and general regulatory issues to contend with than that of a physician practice. On a simplistic basis, these advantages seem to accrue while providing similar investment returns between physician practice and vet practice investments.

CFO Consulting Partners’ healthcare practice is here to help you as we are well versed in hospital, medical and veterinary practices. We can assist vet practices to prepare for an exit while providing private equity with assistance to prepare a consolation strategy, identify acquisitions and assist with due diligence and integration.

Newsletter – June 2018

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Eight Red Flags that your Board Financial Package is Failing to Support Board Needs

Allan Tepper, CFO Consulting Partner LLC

One of the goals of boards is to oversee the financial performance of the company or companies to which they are associated. Informative, transparent financial statements are necessary for boards to discharge those duties. If your board financial package lacks one or more of the following, there would likely be a deficiency in the board’s oversight function.

– The financial package should contain the three basic financial statements – P&L, Balance Sheet and Cash Flow. The benefits of the P&Ls and balance sheets are fairly well known; however, the cash flow statement may not be as well known. The cash flow statement answers the question, “Where did our money go?”

– The package should contain accounts receivable and accounts payable agings.

– Critical notes to the financial statements should be included to explain complex accounting transactions.

– The P&L and balance sheet should be compared to budget.

– The package should contain reasons for variances from budget, and if it does, the explanations should be business reasons, not accounting reasons.

– The package should list the capital expenditures during the month and show how they match up against the capital budget.

– The package should contain key business drivers.

We suggest CEOs and board members speak to a financial management consulting firm to evaluate the adequacy of their board packages. Such firms can review your board packages and make targeted suggestions for improvement.

Newsletter – May 2018

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Is Your Finance Department a Cost or Profit Center?

Allan Tepper, CFO Consulting Partner LLC

To begin, I will define cost and profit centers, using my definition developed after leading accounting and finance functions for over twenty-five years.

Cost centers need to be efficient and be doing critically important tasks. From a company perspective, cost centers need to keep their costs at the lowest possible level while functioning at a highly effective level.

Profit centers have all the same attributes as cost centers, but produce revenue, thereby adding profits to a company’s bottom line.

Well-run finance departments have profit center elements. Although finance departments, as a unit, are not true profit centers because they do not directly produce revenue, they have many positive bottom-line attributes. Finance functions aid other cost and profit centers to be more efficient and effective and incentivize them to work cross-functionally as a team.

There is an often used phrase called a “strategic CFO.” That person would primarily focus on making the whole company stronger. I believe it follows that a goal for all companies should be to make the finance department function more like a profit center than a cost counter.

Examples of how finance departments become strategic include:

– Perfect the closing process so the books are closed quickly and accurately after month end, and time is available for analysis.

– Make the budgeting and reporting process part of a company’s DNA.

– Work with the various company units that feed information to the accounting department in order to make the information accurate and at the proper level of detail.

– Provide analyses that allow for action-oriented decisions. An example would be an analysis of the profitability of various business units. Another could be customer profitability analysis.

– Have the capability – systems and people – to meet the normal demands of all stakeholders on a timely and accurate basis.

– Spearhead merger and acquisition projects.

In summary, well run accounting and finance functions have significant attributes that help improve the bottom line of the whole company. A discussion with a C-level financial management consulting firm should provide insights on how to transform an accounting function from a cost to a “profit center.”

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