Need help evaluating Partnership offer - financials attached

[SaraHilty]

Hi -

I am in Pain Management and am joining a surgical practice affiliated with a hospital.  I received the unusual offer of getting a 5% stake for a total of $75k ($15k for 1%) as soon as I join.  I've been in practice for about 8 years in general.  Their financials look a bit unusual to me, in that no profit is showing and there are a lot of strange line items for large amounts which seem vague.  I am going to ask them to explain these things, but so as I don't sound completely ignorant, wondering if any of you could take a look and give me your thoughts.  I've blacked out any confidential information.

I've been a reader of WCI for many years, but never posted, and I don't see a way to attach a file to this post, so I uploaded it instead, the link is here:

https://www.pdf-archive.com/2017/07/09/2016-surgerycenter-partnership-offer/2016-surgerycenter-partnership-offer.pdf

 

Any help on this would be greatly appreciated, thank you in advance for your time!

 

[Zaphod]

I would at the very least change your screen name in the off chance someone sees this or recognizes you. Anonymity is your friend.

[Zaphod]

So I took a quick look at their rundown there, and it simply doesnt make a lot of sense. They count a lot of things as assets that look by item name to be liabilities and in general have things in odd places, with funny names, and they dont seem to make sense. Like how is an architect fee an asset? Agree lots of giant one line expenses/assets that dont make sense either.

The other giant red flag is that the assets perfectly, ie, to the dollar match their liabilities. This is like book cooking 101. Not implying that at all of course, just that the person who prepared the above "statement" seems to be more interested in things matching up than putting together a statement that has any actual relation to reality or confers any information.

That statement doesnt tell me much other than this was not a trued up report or put together by an accountant. I find it hard to believe and account confuses gross profit and revenue as this statement does, and the mixing of assets/liabilities, etc...It makes it appear they have barely any working capital, like less than the usual doc on this forum has in their checking as float which would be concerning if true.

Lots of eye popping vague giant expenses, but remember I have no idea the specialty or setup of this place, however, let me blindly point out things that caught my eye:

Standard size and distribution of insurances, and then one vague 'other' category for double the amount of the combined itemized ones?

Giant management fees, medical expenses, and payroll expenses. Assume these are for the center, docs, etc...but this looks rife for double counting (as honestly looks they have done several times be my guess).

Business licenses and expenses seems really high.

Transportation over 128k? Maybe they pay for employee cars, nice perk.

Lots of interesting stuff to ask about, I'd get an accountant familiar with medical practices to go over it, but basically right now you cant tell much about anything from this.

[Hatton]

I could not find the document. Beware of poor accounting!!

[SaraHilty]

Thanks Zaphod, that is tremendously helpful!  Sara Hilty is not my real name, so I am anonymous, don't worry.  I did have an account under my real name, but created this fake one just to post these financials.

 

I agree with you on the vague line items, that's what I thought too.  Will definitely ask more questions before joining.

[SaraHilty]

Copy this whole link (not just the highlighted part) into your browser to find the financials:

 

https://www.pdf-archive.com/2017/07/09/2016-surgerycenter-partnership-offer/2016-surgerycenter-partnership-offer.pdf

 

 

 

[ENT Doc]

This is an exceedingly bizarre set of financial statements.  Take the first page for example.  What the ************************ is going on with those payments and adjustments?  Nothing adds up to where the running A/R balance is relevant, at least with the info provided.  The 2016 payments don't equal the fee revenue on the top of their P&L statement.  They seem to have a massive A/R balance but don't list it in their assets (or allowance for bad debts).  They list start up costs under assets and then apply amortization to this (which should only be applied to intangible assets).  I don't see where their assets equals their liabilities, but I do see where assets equal L+OE, which is normal.  They appear to be operating at a loss, so I'm not exactly sure what you expect to be getting for your "investment".  I think I'd run from this - both as an offer and as a practice.  I can't conjure any set of excuses that would make me feel comfortable with this, unless we're back in elementary school and this is Opposite Day.

[jfoxcpacfp]

These financials look as if they were prepared by an office manager with no accounting experience. A debit in Member's Capital Contribution? Am I reading correctly that they have almost $8M in A/R?

Too many questions to list in the short time I have right now, but you definitely need to hire a CPA with expertise in this area. And I'd want an accrual set of books. I'm sure they are filing taxes on cash basis but accrual will tell you a lot more. You also need to see a depreciation schedule.

[Zaphod]

jfoxcpacfp wrote:

These financials look as if they were prepared by an office manager with no accounting experience. A debit in Member’s Capital Contribution? Am I reading correctly that they have almost $8M in A/R?

Too many questions to list in the short time I have right now, but you definitely need to hire a CPA with expertise in this area. And I’d want an accrual set of books. I’m sure they are filing taxes on cash basis but accrual will tell you a lot more. You also need to see a depreciation schedule.

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This is what I think as well, the person who prepared just has no experience and put it "together", which would explain the weird placing and grouping of things that make no sense. Which is a bad sign if they have this much revenue coming in of course, they need a real accountant.

[ENT Doc]

I agree with this, but taking a step back would you sign on to this practice?  The poor quality of these financial statements (which doesn't include cash flow or prior years' statements) alone would make me run.  It's a marker for unscrupulous behavior, lack of diligence, and lack of business-mindedness.  I would want no part in an enterprise like that.  One of my fears would be a cash flow problem.  They have expenses (some of them seemingly absurd) all over the place and comparatively VERY little cash in hand.  Is your $75k the lifeline keeping them afloat?  For how long?  On the contrary, I think these financial statements tell a very powerful story and send a clear signal - run.

[q-school]

Run

[adventure]

Thanks for posting. Totally seems bizarre. That's a lot of cash flying around, but going everywhere else.

Some of (my many) questions:

Where is accounts receivable? I've yet to see a health care entity with such a clean income from "fees". Insurance (and remits) don't pay ASAP, so they AR is usually substantial. How about write offs?

How can you have construction fees of 1.6mil, and depreciation of 1.5 in the same year? Perhaps this is lifetime (but they have architect fees?), in which case they've claimed 94% of the depreciation? (I may have missed something here, but seems strange)

$513 of bank service charges? Who can't keep the account from overdrafting?

Sign me up for 300k of consulting "300.7". I'll take the 48k of "start up cost" too. Plus the 13k of consulting further down.

I'll also note the 75k "due to members". Someone left, they are 75k short, and they want you to fill the hole.

[Donnie]

Aside from the first page, I don't think the financials look that unusual.  You guys probably know better than me since I don't run a practice, but it looks like on the first page the practice billed $12.7M in 2016, collected $2.7M, and wrote off $10.7M.  The $2.7M is on the income statement as revenue.  $10.7M of un-collectible AR sounds high, but I would think it would depend on the specialty, insurance situation, in network / out of network, etc.  The debit in the capital contribution of $15k is likely a member distribution or a share buyback hence the name was blacked out.

The other high expense items that Zaphod mentioned are worth digging into.  Overall, a $1.5M valuation seems high for a business with no net income, so I would pass based on what I see here.

Edit: It is worse than I thought as there is $900k of bank debt on this business, so total enterprise valuation is $2.4M.  Doesn't look like an attractive opportunity to me.  I wouldn't consider investing here unless the business were generating ~$300-500k of net income, and I would only be comfortable on the low end if there were a clear path for growth.

[Zaphod]

ENT Doc wrote:

I agree with this, but taking a step back would you sign on to this practice?  The poor quality of these financial statements (which doesn’t include cash flow or prior years’ statements) alone would make me run.  It’s a marker for unscrupulous behavior, lack of diligence, and lack of business-mindedness.  I would want no part in an enterprise like that.  One of my fears would be a cash flow problem.  They have expenses (some of them seemingly absurd) all over the place and comparatively VERY little cash in hand.  Is your $75k the lifeline keeping them afloat?  For how long?  On the contrary, I think these financial statements tell a very powerful story and send a clear signal – run.

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I agree.

[SaraHilty]

Oh my, you guys (and gals) were REALLY helpful!  You made me laugh too, and then I took your advice and ran.  Thank you, your time spent on writing your feedback is MUCH appreciated!