This entity had multiple locations and was in specialized medicine. Based on our initial review, the all hands meeting, and the benchmark information pulled, this particular enterprise exceeded expectations for the potential purchasers. However, once we started reviewing the detail it appeared the financial records were not in good order. Transactions were recorded across entity lines which is commingling. This could have significant legal ramifications if one of the operating entities were sued. Further, the financial information was reported on the cash basis of accounting and the purchaser and bankers wanted financial statements in accordance with generally accepted accounting principles.
Since this is a medical practice enterprise it is highly dependent on its third party billing company. Accounts receivable records were not in good order. We attempted to perform a roll forward analysis on accounts receivable and were unable to accomplish the task. This is basic accounting 101 and we were already finding significant internal control issues. The insurance adjustments were not properly accounted for by location by patient, which made it very difficult to determine the actual accounts receivable balance at any given time. Further, there was a breakdown in internal control where the company was not tracking charges executed at the clinic level through the entire process which ends with the ultimate collection process. These internal control issues created excessive time in analyzing the books and records and preparing information to complete the quality of earning analysis.
The CEO basically unplugged from the process and was not intimately involved as the CEO should be. The CFO resigned shortly after the process started as a result of receiving pressure to have all the financial information corrected in accordance of GAAP.
The client had a market window where they could have exited the business at a substantial multiple. Unfortunately, as a result of private insurance payment reductions and the decline in overall business, revenues and net profits reported a significant reduction during the fourth quarter of 2016. Therefore the client is now in the process of turning the company around to position it once again for an exit strategy. Fortunately they have hired a new CFO and it appears that the financial side of the business is starting to get in good order.