GeBBS Healthcare Solutions

The Professor's Questions

(The following are the key points of the questions as recorded in my notes, not the professor's original wording.)

1. Does GeBBS in 2017 have an attractive and viable business model?
2. What changes did Thakor implement to address the key critiques of the investment bankers following the 2012 “beauty contest”? Do you think such changes were successful? Why or why not?
3. Regimental Technologies and ChrysCapital valued GeBBS at $150 million and $145 million, respectively. Do you think these were fair valuations? Why or why not?
4. What should Thakor do: Sell 100% of GeBBS to Regimental Technologies? Sell 80% of GeBBS to ChrysCapital? Reject both offers and continue growing the company with the existing management team?

My Answers

Q1. Does GeBBS in 2017 have an attractive and viable business model?

Yes. By 2017, GeBBS had an attractive, viable healthcare services model with growing technology support. Its moat was improving, but it was not a pure software business.

1. It solved an expensive, recurring problem. U.S. providers had to code care correctly, submit claims, appeal denials and collect cash. GeBBS combined healthcare knowledge with lower-cost delivery. A billing error could delay revenue, so accuracy and reliability mattered as well as price. FlexSource let a client start with U.S. delivery and move work offshore when comfortable. (pp.3–6)
2. The model had demonstrated demand and profits. FY2017 revenue was $35.3m, up 36.1%. Adjusted EBITDA was $5.755m, a 16.3% margin. Direct revenue reached $14.1m, or 39.9% of revenue. These are actual results available for judging 2017. FY2018 revenue of $49.3m is later evidence, not information I would assume was known in 2017. (Exhibits 5, 11b)
3. It had a credible way to expand. A small initial contract could lead to more services for the same customer. iCode helped automate workflows and make data useful. Direct relationships with major hospitals improved access to customer needs. MG and the expanded team made delivery less dependent on Nitin alone. (pp.7–9)
4. The risks were still material. Channel revenue was 60.1% of FY2017 revenue. Selling directly could conflict with those channel partners. Large customers could switch, bring work in-house or use another provider. Privacy, service quality, wage costs and dollar–rupee exchange rates mattered. Software helped the service; the case does not establish high-margin recurring software subscriptions. (pp.8, 10; Exhibit 5)
5. I would verify the unit economics before paying for a strong moat. I would ask for customer retention, concentration, contract terms, gross margin by client and service, coding error rates, sales payback and cash collection. The case does not supply enough evidence to claim low churn, predictable subscription revenue or an unbreakable moat.

Classroom line: “I like the business in 2017. It solves a costly problem and already makes money. But I would value it as a technology-enabled service company, with a moat it still has to prove.”

Q2. What changes did Thakor implement to address the key critiques of the investment bankers following the 2012 “beauty contest”? Do you think such changes were successful? Why or why not?

The changes were largely successful. Thakor used the five critiques as an operating plan, and accepted lower short-term earnings to improve the business. The strongest evidence is better revenue mix and a stronger team, not just a higher sale price.

Bankers’ critique	Change	Evidence and remaining limit
Weak management team	Used Korn Ferry; hired MG in late 2013, Stein in 2017, and stronger sales, HIM and operating leaders	More experienced people owned delivery, sales and new products. The later bids specifically praised the management team. Succession was still important.
Little differentiated technology / IP	Invested in iCode; required customers to work with the company during software development	Technology improved workflows, visibility and decision support. The case does not isolate software revenue or measure how hard competitors would find it to copy.
No marquee direct clients	Won major hospital systems and expanded direct selling	Direct revenue rose from $7.1m in FY2015 to $28.8m in FY2018. Direct share rose from 31.5% to 58.3%.
Commodity labor arbitrage	Added more complex services, cross-selling, patient contact and payer solutions	By FY2018, revenue included RCM 45%, HIM 41%, patient contact 7% and payer solutions 7%. The company remained people-intensive.
Too dependent on Thakor	Delegated real operating authority to MG; used Vision 2020 and a broader leadership team	Thakor stopped managing every detail of India operations. Both final buyers still wanted Thakor and MG involved, so key-person dependence was reduced, not eliminated.

The financial evidence supports the change. Revenue rose from $11.6m in 2012 to $49.3m in FY2018. Adjusted EBITDA rose from $5.755m in FY2017 to $10.760m in FY2018, about 87%. In FY2018, direct revenue grew about 104%, while channel revenue declined 3.1%. This was a meaningful change in where growth came from. (pp.6–10; Exhibits 5, 6, 11b)

There are three limits to my conclusion. First, the later $145–150m headline offers also reflect a larger business and an active M&A market; I would not attribute the whole increase from the 2012 $30m indication to management improvements. Second, gross margin was still below the case’s healthcare IT benchmark, and some buyers questioned revenue per employee. Third, customers and cash collection remained risks. FY2018 pre-tax cash flow was only $4.8m after working-capital investment and capital expenditure, against about $10.8m adjusted EBITDA. (pp.9–10; Exhibit 11c)

Classroom line: “He made the company less dependent on cheap labor, intermediaries and himself. That is why I call the changes successful. But the transition was incomplete.”

Q3. Regimental Technologies and ChrysCapital valued GeBBS at $150 million and $145 million, respectively. Do you think these were fair valuations? Why or why not?

Both were defensible headline enterprise values. I would treat them as a reasonable negotiating range, not as two equally certain cash prices or a precise measure of intrinsic value.

First, use consistent earnings. The table below uses the precise FY2018 adjusted EBITDA from Exhibit 11b and the newer figures in Exhibit 12. All calculations are EV / EBITDA; they are not P/E ratios.

EBITDA denominator	Regimental $150m	ChrysCapital $145m
FY2018 actual adjusted EBITDA $10.760m	13.94×	13.48×
LTM June 2018 adjusted EBITDA $12.1m	12.40×	11.98×
Fully ramped adjusted EBITDA $14.7m	10.20×	9.86×
FY2019 forecast adjusted EBITDA $13.638m	11.00×	10.63×

The latest actual LTM figure is my starting point. Fully ramped earnings require execution, and forecast earnings are not already earned. GeBBS’ growth, direct clients and technology can support a premium to the case’s broad 2018 North American M&A median of 9.7×. But that broad median is only a rough reference. (Exhibits 8, 11b, 12)

Second, public peers give a noisy check. Exhibit 10 implies EV/EBITDA multiples of 54.6×, 39.9×, 23.9×, 55.8× and 13.9× for its five peers. Weak EBITDA can produce a very high multiple. The businesses differ in scale, software mix and profitability; two have net losses. I would not apply the simple average to GeBBS. Also, the exhibit is dated December 31, 2018, after the November decision. It is a classroom reference supplied by the case, not a quotation known on the decision date.

Third, cash flow supports a range rather than an exact number. Exhibit 11c provides pre-tax cash flow. It is not ready-to-use after-tax free cash flow. The illustrative DCF below uses the supplied annual forecast, a 12% tax assumption and no depreciation tax shield because the case does not provide a complete D&A schedule. At a 15% discount rate and 3% terminal growth rate, the FY2018 year-end benchmark is about $139.6m. Holding terminal growth at 3%, the value ranges from $108.6m at 18% to $191.9m at 12%. About 73.6% of the base value comes from the terminal value. These assumed rates test the price; they do not prove it. The benchmark is not a precise November 2018 valuation.

Fourth, compare the actual deal economics. Regimental offers $120m at closing plus a conditional $30m. With full payment assumed, a 12% illustrative discount rate and year-end timing, the headline $150m has a present value of about $144.71m before escrow, costs and tax. If expected payments were half of each earn-out amount, it would be about $132.36m. The probabilities and rate are assumptions, and the contract’s catch-up provision makes actual timing more complicated.

ChrysCapital’s $145m is the value of the whole business. Selling 80% does not produce $145m of seller cash. In a simplified cash-free/debt-free bridge, before working-capital adjustments, incentive dilution, escrow, fees and tax, the 80% sale is $116m and the 20% retained interest is marked at $29m. Retained equity is risky and illiquid. Acquisition financing must be analyzed separately from existing target debt.

My judgment: the competitive process and the business improvement make both offers credible. Regimental’s higher headline does not establish a better offer. I would negotiate the consideration, governance and funding details rather than reject both simply because a favorable forecast produces a higher DCF.

Q4. What should Thakor do: Sell 100% of GeBBS to Regimental Technologies? Sell 80% of GeBBS to ChrysCapital? Reject both offers and continue growing the company with the existing management team?

I would choose ChrysCapital’s 80% acquisition as the preferred path and grant exclusivity after agreeing the main funding and governance terms. This is a choice to sell control while retaining a smaller economic stake.

The choice fits four needs. First, it lets the family realize much of its concentrated wealth. Second, it keeps exposure to future growth through a minority stake. Third, ChrysCapital offers sector knowledge, an operating partner, healthcare relationships and experience scaling companies toward the revenue level GeBBS wants. MG has worked successfully with the firm before. Fourth, the structure offers a route to meet management’s liquidity and incentive needs. None of these benefits guarantees future returns. (pp.7, 12–13)

Regimental is a credible alternative. It has a large balance sheet, a respected name, acquisition capacity and possible cross-selling benefits. But the $30m earn-out depends on performance after control has shifted. Both executives would have three-year employment commitments. This is not a clean, immediate retirement. The negotiation over earn-out timing is useful evidence of how difficult future decisions could become, without proving the buyer would behave badly.

I would not choose continued independence as the base case. It preserves control and all upside, but leaves the family’s concentration, management liquidity, founder fatigue and funding constraints unresolved. Growing from $100m to $300m needs more than repeating the earlier operating model. A future sale also depends on the market, not just the company’s earnings. Independence remains the fallback if the final terms destroy the benefits of the PE option.

The cost of my choice is real: ChrysCapital would hold four of seven board seats. Thakor’s two seats and chairman title do not preserve control. The retained interest is illiquid and can be affected by leverage, future dilution and exit timing. A warmer negotiation does not replace written rights.

Before signing, I would settle:

1. Funding and distributions: reconcile the “debt-free” narrative with the $35m debt in Exhibit 12; identify the borrower, guarantees, dividend obligations, covenants and limits on later acquisition debt.
2. Operating authority: put budgets, senior hiring and removal, acquisitions and material strategy changes into a clear decision framework. Define ordinary management authority and the matters requiring board or minority consent.
3. Minority economics: document incentive-pool dilution, new share issues, related-party transactions, information rights and how retained shares rank economically. Clarify the NWC peg and the EV-to-equity bridge.
4. Exit and commitments: agree tag-along and drag-along terms, liquidity routes, lockups and management vesting. Confirm the time commitment and succession plan for both Thakor and MG.

These are proposed negotiation points, not rights the case says the family already has.

Classroom vote: “I would sell 80% to ChrysCapital. It gives the family liquidity and brings useful capabilities for the next stage. But I would be clear that I am selling control, and I would protect the remaining stake through the agreement.”

Case Summary

Nitin Thakor's father, Vijay Singh, had founded a computer monitor company, which closed after India's economic environment changed. Thakor then returned to the US and in 1997 founded GeBBS Consulting from his home, outsourcing American software development work to India. By 2000 the company's revenue reached $20m, but after the tech bubble burst its main clients cut back. By 2003 he had cut costs and restored profitability, handed day-to-day management to the team, and started looking for his next venture. (Case text pp.4–5)

From that earlier experience, Thakor concluded: with no client focus, no differentiated intellectual property and competing mainly on low price, it was hard to retain talent and clients. He spent about $100,000 exploring opportunities and chose US healthcare back-office services. In 2005 he and his father founded GeBBS Healthcare. With limited capital and brand at first, they began as subcontractors to US medical billing companies before developing direct hospital clients. Professionals in India handled medical coding and billing, while the US team could serve clients unwilling to offshore work; once clients built trust, they could choose whether to move delivery offshore. (Case text p.5)

The business expanded from RCM (revenue cycle management) into HIM (health information management), and gradually came to cover patient engagement and services for government healthcare payers. FlexSource let clients choose the technology, workflow and delivery location; Land and Expand meant entering through one service a client was willing to buy, then cross-selling more. (Case text pp.5–8; Exhibit 6)

In 2010, with revenue of $8m and EBITDA of $2.8m, an Indian BPO company made a $20m acquisition offer, but the deal fell through at the last stage. In 2012 revenue rose to $11.6m, with more than 1,000 employees. Thakor invited investment banks to pitch for a sale mandate; the "beauty contest" refers to banks competing to be hired, not buyers bidding. The bankers pointed to problems in five areas — the management team, differentiated technology, marquee direct clients, the value-add of the services, and dependence on the founder — and thought it might only sell for about $30m. (Case text pp.6–7)

The family decided to keep investing and accept short-term pressure on profits. At the end of 2013, MG joined to run Indian operations and professionalize the organization. Thakor promised him real room to run the business and to deliver on his equity within about five years. The company strengthened its sales, HIM and operations teams, drew up Vision 2020, developed iCode with client participation in its design, and landed well-known hospital system clients. In 2017 Gabe Stein joined and drove sales and the payer business. FY2017 revenue was $35.3m, reaching $49.3m in FY2018, with direct sales becoming a major source of growth. (Case text pp.7–9; Exhibits 5, 11a)

From 2017 the company revisited a sale and hired Houlihan Lokey. In May 2018 it launched a broad outreach covering 185 potential buyers; 119 requested confidential materials, 17 submitted preliminary indications of interest, it narrowed to four in July and two remained in November. Regimental offered an outright sale; ChrysCapital offered a PE deal acquiring up to 80%. The company was seeking the capabilities and capital needed to get to $300m in revenue; the family wanted to reduce its wealth concentration, and Thakor had borne thirteen years of continuous operating pressure. The case stops at the decision point: which party to grant exclusivity to, or whether to walk away from both offers. (Case text pp.2, 9–13)

Key Data

Dimension	Figure, fact or estimate	Source
First sale attempt	2010 revenue $8m, EBITDA $2.8m, offer $20m, deal fell through	p.6
2012	Revenue $11.6m, more than 1,000 people, bankers' valuation expectation about $30m	pp.6–7
FY2015–18 revenue	$22.6m, $26.0m, $35.3m, $49.3m; growth of 36.1% and 39.6% in the last two years	Exhibit 5; Excel Exhibit 5!D11:G12
2012–18 revenue CAGR	(49.3 / 11.6)^(1/6) − 1 ≈ 27.3%, years roughly matched between case text and FY2018	My calculation
Direct revenue	FY2015–18: $7.1m, $7.4m, $14.1m, $28.8m; direct share 31.5%, 28.7%, 39.9%, 58.3%	Exhibit 5; Excel D5:G6, D15:G15
Channel revenue	FY2015–18: $15.5m, $18.5m, $21.2m, $20.6m; FY2018 share 41.7%, down 3.1% year on year	Exhibit 5; Excel D8:G9, G16
2017 actual profitability	FY2017 EBITDA $5.038m; adjusted $5.755m, margin 16.3%	Exhibit 11b; Excel Exhibit 11B!F6,F18,F21; that table is in thousands of dollars, amounts divided by 1,000
FY2018 actual profitability	EBITDA $10.243m; adjusted $10.760m, margin 21.8%; year-on-year adjusted EBITDA growth 10.760 / 5.755 − 1 = 87.0%	Exhibit 11b; Excel G6,G18,G21; my calculation
Consistent FX basis	FY2018 adjusted EBITDA at 2018 USD exchange rates $10.697m; not to be mixed with $10.760m	Exhibit 11b; Excel G27
FY2018 business mix	RCM 45%, HIM 41%, patient engagement 7%, government payer solutions 7%	Exhibit 6
People and clients	The 2017 development section of the case lists 5,000 people in India, 100 in the US, 450 in the Philippines; well-known clients include Memorial Sloan Kettering, Johns Hopkins	p.8; headcount is on that section's basis, not to be forced against another fiscal year's revenue for a precise productivity figure
Gross margin benchmark	FY2018 GeBBS 42.2%; case cites US healthcare IT industry at 51.6%	p.10, Exhibit 11a; benchmark sample isn't a perfect peer set
FY2018 cash conversion	Adjusted EBITDA approx. $10.8m − ΔNWC $4.0m − Capex $2.0m = pre-tax cash flow $4.8m, about 44.4%	Exhibit 11c; Excel Exhibit 11C!G19,G21:G23
Projected revenue	FY2019–22: $63.2m, $84.4m, $107.2m, $133.5m	Exhibit 11a; Excel Exhibit 11A!H5:K5
Projected adjusted EBITDA	FY2019–22: exact values $13.638m, $19.393m, $25.806m, $33.932m; summary table shows $13.6m, $19.4m, $25.8m, $33.9m	Exhibits 11b, 11c; Excel Exhibit 11B!H18:K18, Exhibit 11C!H19:K19
Projected pre-tax cash flow	FY2019–22: $10.0m, $12.8m, $17.9m, $25.0m	Exhibit 11c; Excel H23:K23
Projected pre-tax cash flow components	ΔNWC: $1.1m, $3.3m, $3.6m, $3.6m; Capex: $2.5m, $3.4m, $4.3m, $5.3m	Exhibit 11c; Excel H21:K22, negative signs in original table are cash outflows
Tax rate and cost-of-capital clues	Effective tax rate 12%; 10-year Treasury 3.01%; borrowing rate 5.5%; missing full D&A, equity risk premium and target capital structure	Exhibit 11c notes; these notes are in the PDF, not fully included in the Excel
Most recent profit basis	June 2018 LTM adjusted EBITDA $12.1m; Fully Ramped adjusted EBITDA $14.7m	Exhibit 12 notes; the latter is on a fully ramped basis, not another set of actual historical profits
R's offer	EV $150m, targeting 100% acquisition (attached table also notes 80% at close); $120m upfront; earn-outs of $15m, $7.5m, $7.5m, conditional on FY2019–21 performance, with a catch-up mechanism in the last two years	pp.12–13; Exhibit 12; full eventual acquisition differs from CC's long-term retained minority stake
CC's offer	EV $145m, up to 80% acquired, cash consideration; under simplifying assumptions such as no net debt, 80% = $116m, 20% = $29m	Exhibit 12; the latter two values are my calculation, not confirmed net proceeds to sellers
Escrow and NWC	R: 10% of price in escrow for 36 months, NWC escrow TBD; CC: 5% escrow for 12 months (subject to RWI terms), 50% NWC escrow for 3 months, NWC target $10m from buyer, $9m proposed by seller	Exhibit 12; the base for the "50%" must be checked in the definitive agreement, can't assume half of the entire NWC is deducted
Board	CC seven seats: four CC, two Thakor, one independent; Thakor as chairman	p.13; Exhibit 12
Incentives	R: ESOP worth 4–5% of GeBBS's $150m EV, i.e. $6–7.5m; CC: $14.5m incentive plan, NT $4m, MG $4m, other management and reserve $6.5m	Exhibits 12; incentives aren't immediate cash to sellers, vesting and dilution need checking
Financing contradiction	Case text says CC has no debt; attached table calls $35m (about 2.9 × LTM EBITDA) modest leverage, which can sit at CC HoldCo and be serviced from dividends CC receives	p.13 vs Exhibit 12; final structure needs verifying, don't silently pick one
Sale process	185 contacted, 73 strategic, 112 financial; 119 requested the CIM (23 strategic, 96 financial); 17 indications of interest; initial EV $95–142m; final four $120–150m	pp.10–11
Market benchmark	2018 North American all-industry M&A median EV/EBITDA 9.7×	p.9, Exhibit 8; broad market benchmark, not a precise comparable
Class DCF assumptions	FY2018 year-end valuation date; year-end cash flows; tax rate 12%; D&A temporarily set to zero so no depreciation tax shield; discount rates 12/15/18%, perpetual growth 2/3/4%	My own scenarios, not a fair value given in the case; see Q3 for details
Class DCF results	Base case r=15%, g=3%: EV $139.62m, PV of terminal value 73.6%; at r=12/15/18%, g=3%: $191.90m / $139.62m / $108.55m	Calculated from Exhibit 11c; full workings and limitations in Q3
Illustrative earn-out PV	Assuming all achieved, year-end payments, r=12%: 120+15/1.12+7.5/1.12²+7.5/1.12³ = $144.71m; if only half of each payment is expected, $132.36m	My own class calculation, before taxes, fees, escrow and claims

A note on the basis of the materials. The first question asks us to evaluate 2017, so the answer should rest on FY2017 actual results and the capabilities that existed at the time; FY2018 can only serve as an after-the-fact check. The final deal choice happens in November 2018. Case p.1 mentions a more optimistic expectation of $100m in revenue and a 30% EBITDA margin the following year, while Exhibit 11a shows $84.4m and 23.0% for FY2020. Treat these as different forecast scenarios; you can't splice the former's revenue with the latter's costs into one model. The case text says HIM expanded in 2009, while Exhibit 6 shows it starting in FY2008; the discrepancy in the original is kept here, and no precise growth judgment is drawn from it.

Key People

Person / Organization	Role	Stance and role in the story	Power or relationships
Nitin Thakor	Co-founder, CEO, representative of the family shareholders	Wants to reduce concentration risk while balancing growth, the team and his own energy	Core sale decision-maker; after a CC deal, a minority shareholder and chairman
Vijay Singh and family	Co-founder, family owners	Wealth highly concentrated in the business; memories of an early venture failure and debt	Holders of the economic interest; not decided purely by the CEO's personal preferences
Milind Godbole (MG)	Managing Director	Initially thought it was too early to sell, later accepted that expansion needs new capabilities; worries that earn-out targets are under the buyer's control	Key executor; has an agreement to realize his equity in roughly five years; has worked with CC before
Gabe Stein	EVP, sales and payer business	Expanding sales and new business	One of the executives reducing single-point dependence on the founder
Houlihan Lokey / Jon Pritti	Sell-side bank / lead banker	Runs a broad competitive process, screening and negotiation	Adviser and process designer; doesn't make the family's life and governance trade-offs for them
Regimental Technologies	Strategic acquirer	Seeking healthcare business, clients and technology synergies	Plans to eventually own all the equity; brings platform resources and integration demands
ChrysCapital / Sanjay Kukreja	PE buyer / investment lead	Partner with management to drive growth, with a future sale or IPO	Plans to hold up to 80%; four board seats, the de facto controlling party
Clients and potential buyers	External constraints	Focused on service quality, channel conflict, cross-border structure and sustainability of profits	Affect cash flow, valuation and deal completion, but are not internal governors of the company

Core Tensions

1. Family liquidity vs the next round of growth: R offers a full exit path but with earn-out risk; CC lets the family cash out most of its stake and keep some upside, but also keeps minority-stake risk.
2. Operating influence vs legal control: CC's partnership style fits the team's preferences better, but four board seats show that control has shifted. The chairman title is no substitute for contractual rights.
3. Technology differentiation vs labor-intensive delivery: iCode and co-creation with clients raise the value-add, but headcount, gross margin and productivity concerns show the company still carries the cost structure of a services business.
4. Direct client growth vs channel partnerships: Direct revenue surged in FY2018 while channel revenue declined; owning more of the client relationship also brings potential channel conflict.
5. Higher future valuation vs the cost of waiting: Profits are still growing, but the family's concentrated risk, the equity promise to management, the capability gap for the next stage and the market cycle all make waiting costly.