When we are approached by healthcare business owners contemplating a sale and researching their options for assistance, a common question we're asked is: "Why should I hire a specialized healthcare mergers and acquisitions (M&A) advisor for my company?"
The simple answer is that an M&A advisor who specializes in healthcare is more likely to help owners achieve successful transactions, with "success" including a fair sales price and the passing along of the business to a company that will continue to treat staff and customers well.
9 Reasons to Work With a Healthcare M&A Advisor
For a more complete answer to why healthcare business owners should work with healthcare M&A advisors, here are nine reasons.
1. Leveraging extensive experience
A healthcare M&A advisor generally has experience in representing companies in various healthcare verticals and broad knowledge of the healthcare industry. This will help a business owner prepare for the sales process with insights about the owner's unique market. When the advisor is part of a larger healthcare M&A advisory firm, like VERTESS, they are further supported by other advisors and experts who can share additional insights.
2. Improving the selling process
Selling a healthcare business is a complex process filled with multiple tasks that can be overwhelming and often underestimated by owners given that most have not experienced the sale of a company before. Simultaneously, a healthcare business owner is typically busy running their company, which limits the amount of time and energy that can be allocated to the sales process.
Bringing aboard a healthcare M&A advisor can smooth the transaction process while better ensuring a high return on investment. There are always obstacles and bumpy roads in the process of selling a healthcare company, but a savvy advisor helps sellers navigate them and avoid the many reasons transactions can fail to secure a successful agreement with a buyer or investor.
3. Maximizing healthcare business value
A healthcare M&A advisor will be able to market the healthcare company to more targeted buyers, and this will often lead to more high-quality partner options for the seller. More value could mean creative strategic partnerships, maintaining the owner's legacy, retaining a core management team, and higher price and/or better terms in the sales agreement.
4. Integrating healthcare knowledge into marketing
Effective healthcare M&A advisors integrate their knowledge of a specific healthcare vertical and broader healthcare industry knowledge into their marketing approach. Utilizing established industry relationships and networks, a healthcare M&A advisor can connect sellers with buyers and investors that have the highest appreciation for the seller's market segment and potential value of their business.
5. Showcasing value
Through their many years working in the healthcare industry, a veteran M&A advisor has learned what financial analysis and presentation will resonate most with potential buyers. As a result, they will make sure that marketing materials feature a professional financial analysis that contributes to the highest valuation.
6. Painting a complete picture
Skilled healthcare M&A advisors generate a confidential information memorandum (CIM) — otherwise known as "the marketing book" — to tell a healthcare company's story to prospective buyers. The CIM includes information that speaks to significant areas of interest for buyers, such as successes, differentiators, growth opportunities, local market dynamics, and larger healthcare market trends. The completeness of the CIM is usually correlated to the healthcare M&A advisor's understanding and experience and their ability to tell the compelling story of the healthcare business and its owner(s).
7. Managing the healthcare transactions process
Competent healthcare M&A advisors will manage a sales process in which various buyers are screened by level of interest, commitment, and financial qualification to complete a fair transaction. Within their networks, healthcare M&A advisors often access unique market intelligence to assist them in their representation and execution.
8. Closing the deal
Healthcare M&A advisors often know about unique, market-related nuances that will help with the final negotiation of deal terms. This understanding can help guide the business owner through escrows, non-compete or interim management agreements, and other critical decisions on the way to a successful sale.
9. Delivering value
The ninth and final reason to work with a healthcare M&A advisor — delivering value — is a composite of the above. In a time of much turbulence and opportunity in today's healthcare industry, an accomplished healthcare M&A advisor often brings value that far exceeds their fee while helping sellers reach the goals that were established prior to starting the sales journey.
VERTESS: A Top Healthcare M&A Advisory Firm
If you're contemplating a sale of your healthcare business and are looking for a partner that can help you achieve your sales goals, reach out to VERTESS. Our team of Managing Directors, who specialize in specific healthcare verticals, has the extensive healthcare transaction experience that leads to more successful sales. This track record recently helped us earn the distinction of being named the #1 lower middle market investment bank for the first quarter of 2024 by Axial, and I was proud to be recognized as the advisor for one of Axial's top 8 deals in 2023.
To learn what VERTESS advisory services can do for you and your healthcare business, reach out to us today!
Bradley Smith ATP, CM&AA
For over 20 years I have held a number of significant executive positions including founding Lone Star Scooters, which offered medical equipment and franchise opportunities across the country, Lone Star Bio Medical, a diversified DME, pharmacy, health IT and home health care company, and BMS Consulting, where I have provided strategic analysis and M+A intermediary services to executives in the healthcare industry. In addition, I am a regular columnist for HomeCare magazine and HME News, where I focus on healthcare marketplace trends and innovative business strategies for the principals of healthcare companies.
At VERTESS, I am a Managing Director and Partner with considerable expertise in Private Equity Recapitalizations, HME/DME, Home Health Care, Hospice, Medical Devices, Health IT/Digital Health, Lab Services and related healthcare verticals in the US and internationally.
We can help you with more information on this and related topics. Contact us today!
FORT WORTH, Texas, July 24, 2024 /PRNewswire/ -- As healthcare-specific merger and acquisition (M&A) advisors, VERTESS (https://vertess.com/) has been asked frequently by healthcare business owners "How is the market in 2024?" and "Is now a good time to sell my company?" We understand that most owners believe they must wait until the market tea leaves reveal the optimal time to sell to secure the best price. In response, we can speak to significant macro conditions, such as interest rate activity, inflation shifts, and global events. Those all will generally have an impact on prices of transacted companies. However, the far more critical indicator for when a sale is optimal will always be when the owner is ready to move on to whatever is next in life.
At VERTESS, we recognize that owners are likely the most important person to the business. They are its biggest cheerleader. They have invested more in it than anyone else, so they typically will make the biggest and greatest impact on the business. If owners wait to try to time the market or take advantage of some other perceived opportunity, they run the risk of souring on the business and becoming burned out or disenfranchised. If that happens, the business is going to suffer, and that will likely lead to a decline in sales price.
Of course, interest rates continue to be a substantial issue affecting healthcare businesses. They are high and the Fed isn't likely to start reductions until the end of this year or the beginning of 2025 due to sticky inflation and a strong labor market. If an owner wants to get a bank loan for their business, they're looking at 10-plus percent. How has the market responded to rising interest rates? Bank loan activity has slowed, and people are deploying more equity. Private equity firms are maybe doing one or two turns of debt equity, with the rest of their payment coming out of pocket. Two years ago, when interest rates were about half of what they are now, these firms might do half a deal in debt.
Buyers find a way to evolve to what's happening in the market and buy the businesses they want to acquire. Buyers, especially strategics, bake acquisitions into their growth strategies. It's their "buy-and-build" strategy. Buyers know they're going to grow organically every year at X rate, and then they plan for inorganic growth at a certain rate, which is accomplished through acquisitions. Inorganic growth is typically identical to, if not larger than, organic growth rate.
Regardless of the market today or what's projected over the next 12-plus months, buyers are going to set acquisition mandates and work to achieve them. Buyers need to buy companies to scale their businesses. It's part of part of the fabric of their operations and what they're used to doing — and that's not going to change, regardless of what's happening nationally and internationally.
"Ultimately, owners should know what's happening in the market as this can affect matters like budgeting, staffing, and purchasing. But when it comes to selling your company, don't let what is happening in the market influence your plans. The risks of doing so far outweigh any potential benefits," cautions VERTESS Managing Director/Partner Bradley Smith. "If you own a successful business, you should be able to find a buyer and one that offers you a good, fair price, regardless of what's happening in the market. The key to a successful sale is to run a proper process that results in all interested buyers — and the right buyers — coming together simultaneously and making their best offers. That's how you'll know you're getting the best price for your company."
For more information, please contact Vaughne Glennie at 380788@email4pr.com or +1.520.395.0244.
FORT WORTH, Texas, July 16, 2024 /PRNewswire/ -- VERTESS (https://vertess.com), a leading healthcare mergers and acquisitions (M&A) advisory firm, is pleased to announce the successful completion of a third pharmacy deal this year. This deal closely follows two additional pharmacy transactions completed in Q2.
Keystone Specialty Pharmacy (https://keystone-pharmacy.com/), a customized, specialty pharmacy out of Mississippi, was purchased by Novastone Capital Advisors (NCA) (https://www.novastone-ca.com/index.php), a Switzerland-based private equity firm, as part of their Entrepreneurship through Acquisition (ETA) Program. Keystone prides themselves on offering health care providers new resources to treat serious infections while also being committed to maintaining the highest ethical standards in business. Dr. Lisa Piercey, NCA's Entrepreneur, will lead the pharmacy as it continues its mission of providing critical care.
The transaction was overseen by VERTESS Managing Director, Alan Hymowitz, who previously owned and operated a pharmacy before his tenure at VERTESS. His unique background was invaluable in leading this transaction to a successful conclusion. He noted what a demanding and lengthy process this transaction was, but that he is thrilled for his clients to see this deal across the finish the line.
Keystone owners, Jeffrey and Kim Clark, reflected on the transaction process sharing, "Alan Hymowitz and the team from VERTESS understood the importance of finding a strategic investor who would continue our mission 'Our goal is to heal and not refill.' VERTESS found the ideal fit for our pharmacy, one who we have confidence will take care of our patients with excellence while expanding the business we started. We are extremely grateful to Alan, David Coit, and the rest of the VERTESS team for their diligence and expertise in bringing our deal to close. Their guidance through this process has been a blessing to us both."
For more information, please contact Vaughne Glennie at 380413@email4pr.com or +1.520.395.0244.
Volume 11, Issue 12, July 2nd, 2024
By: David E. Coit, Jr., DBA, CVA, CVGA, CM&AA, CBEC, CAIM
Why should a buyer's costs of integrating an acquired company be of interest to the seller? The most important reason is that sellers often pay part or all the integration costs of the buyer. According to McKinsey & Co., the average cost of integration is between 15% and 20% of an acquisition's purchase price.
How do buyers' integration costs become a concern for sellers? Buyers typically determine the offering price based on expected future cash flows received from the acquired company. When buyers estimate future cash flows, they often include the anticipated costs of integrating the acquired company. Thus, the purchase price is often net of the buyer's expected integration costs.
If you're considering a sale of your healthcare company, you might be wondering: What can I do to influence the buyer's cost of integration?
That's a great question! There are several actions sellers can take before going to market that can reduce the buyer's integration costs. Moreover, those cost savings may allow potential buyers to increase their offering price because of a perceived increase in first-year cash flows from the acquisition.
How to Cut Healthcare Acquisition Integration Costs
Let's discuss eight areas where sellers may want to take steps before selling their company that can reduce a buyer's integration costs and potentially increase offers and the final sale price.
1. IT software applications
Buyers typically migrate the information technology (IT) used by an acquired company to match the applications the buyer uses. Software migration can be a costly and time-consuming process, especially if the seller is using legacy systems and outdated technology, in-house developed software, and/or has inaccurate or incomplete data. On the other hand, using widely used, industry-specific applications and having clean and current data will considerably ease the migration process.
In addition, providing buyers with a listing of IT applications used, the methodology of data collection and data verification, and a scheduled IT software maintenance program will allow buyers to better determine the estimated time and expense of IT integration.
2. Repair and maintenance
Believe it or not, some sellers defer routine repair and maintenance in the months leading up to the sale of their business. While this may seem like a good way to increase the seller's cash flow before selling their business, buyers will likely discover such deferred expenses during due diligence and predictably take a dim view of such actions. Moreover, buyers will estimate their costs of remedying or mitigating the deferral.
It's better to keep up with scheduled repairs and maintenance as though the business wasn't being sold than having buyers decrease their offering price to account for these necessary expenses. However, sellers should not needlessly incur excess repair and maintenance costs before going to market. Keep in mind that companies sell for a multiple of cash flow. As such, every dollar increase in cash flow returns a greater dollar amount in the price of the company.
3. Turnover
Buyers usually expect a post-acquisition drop in the acquired companies' revenue due to employee turnover, client/patient turnover, or referral source turnover. A key aspect of integration is the retention of essential employees, clients/patients, or referral sources.
If the seller can show buyers that they've taken and will continue to take actions to mitigate turnover, buyers will be less concerned about revenue loss and the associated costs of retention. In addition, sellers who demonstrate a commitment to work after the sale to address possible retention issues show good faith to prospective buyers.
4. Capital expenditures
Buyers often expect that sellers have underinvested in capital expenditures (Capex) leading up to the sale of their healthcare businesses. Appropriate investment versus underinvestment is a difficult issue to address. On the one hand, replacing older equipment does not necessarily increase the offering price from buyers. On the other hand, buyers may adjust their offering price after due diligence once they've determined the estimated costs associated with underinvestment.
A good rule of thumb is to continue Capex dollars based on historical needs. In other words, consider keeping up with maintenance Capex but limit the amount spent on long-term growth Capex. The most typical underinvestment in Capex is new computers for employees. Beware of acquiring new computers that may not meet the buyer's IT specifications. In other words, be smart and frugal with CapEx dollars before going to market.
5. Facilities
Before interacting with potential buyers, a seller won't know the facility needs of buyers. Many buyers don't want to own real estate. Others may have operations with excess capacity near the seller's location(s).
Perhaps the best way to address the issue of facilities is (1) the seller should not undertake any leasehold improvements before going to market, (2) sellers should avoid long-term lease extensions or related commitments, and (3) if the facility(ies) is/are owned, consider looking into alternative options should the buyer chose not to acquire real estate. Sellers don't want to be in a position where the buyer decreases the offering price because the seller needs to unwind facility(ies) commitments.
6. Open staff positions
It's commonplace for sellers to avoid filling open staff positions before selling their business. Such situations can be a two-edged sword. The buyer will discover unfilled positions during due diligence and factor in the cost of filling the positions by repricing their offer. On the other hand, the seller may be able to fill open positions at a wage rate or salary lower than the buyer's estimated compensation. Conversely, the buyer may be able to fill certain open positions where the buyer has existing staff to fill open positions.
I recommend the seller discuss this matter with their healthcare M+A advisor or potential buyers before the buyers make an offer to acquire the business. One other consideration is the potential to outsource open positions with independent contractors. For example, contracting with a fractional chief financial officer rather than hiring a full-time CFO.
7. Contracts, licensing, certifications, and subscriptions
Buyers will discover any past-due, expired, or soon-to-expire contracts, licensing, certifications, or subscriptions (CLCS). Sellers should keep essential CLCS' up to date. However, before going to market, sellers should evaluate each CLCS to determine the value of reviewing or extending the CLCS. For example, older certifications may be of little value because of changes in the industry. Similarly, certain subscriptions may not be of value to buyers and thus an unnecessary waste of funds.
For example, some physicians elect to be members of various associations like the American Medical Association, Medical Group Management Association, and/or state medical societies. If these CLCS do not drive revenue or business value, consider not renewing the CLCS.
8. Accounting/financial reporting
We regularly advise our clients whose financial reporting is on a cash basis to convert to an accrual basis before going to market. Accrual basis accounting is a more accurate method of financial reporting than cash basis accounting. We also recommend that their accrual basis accounting conform with generally accepted accounting principles (GAAP).
One way to ensure that a company's financial statements are GAAP compliant is to have a CPA firm perform an audit. Audited financial statements can provide buyers with confidence in the reliability of the financial reporting.
An alternative to having audited financial statements is to have an accounting firm prepare a seller's quality of earnings (QofE) examination. A QofE is an assessment of a company's performance that removes anomalies and poor accounting or bookkeeping methodologies, and more accurately reports a company's true performance.
Many buyers will undertake a QofE as part of their due diligence process. When sellers provide buyers with a seller's QofE report, as my colleague Bradley Smith discussed in this column, buyers gain confidence in the accuracy of the seller's financial reporting.
Moreover, buyers may either accept the seller's QofE rather than having a third party perform a QofE or hire a CPA firm to review the seller's QofE report. In either case, the buyer saves time and money and will be able to quickly determine the riskiness of the seller's company.
Impact on a Potential Healthcare Acquisition
Imagine you are looking at acquiring one of two healthcare companies in your industry. One of the companies uses similar IT software applications as you; keeps current on routine repairs and maintenance; has a sound record of low employee turnover; has no underinvestment in Capex; has the option to renew their facility's lease (which is now month-to-month); has no unfilled staff positions; is current with all contracts, licensing, and certifications; only has necessary subscriptions; and has accurate and verified financial reporting.
The other company is using proprietary or in-house developed IT software applications, is significantly delinquent in routine repair and maintenance; has higher than usual employee turnover; is underinvested in Capex; has a long-term facility lease contract on an undesirable property; has several unfilled open staff positions; is past-due on renewing contracts, licensing, and certifications; has many unnecessary contractual subscriptions; and has numerous accounting errors in their cash basis financial statements. Which company would you be willing to offer a higher purchase price? Which company would you perceive as a risky investment? Which company would you expect to spend less money on during integration?
It's easy to see how putting in some work to reduce acquisition integration costs can lead to more offers and higher offers while increasing the likelihood of a successful sale. If you are thinking about selling your healthcare company and would like to discuss ways to decrease acquisition integration costs and make your business more appealing to prospective buyers, reach out to me or any other member of the VERTESS team. We would welcome the opportunity to speak with you!
David Coit DBA, CVA, CVGA, CM&AA, CBEC, CAIM
I am a seasoned commercial and corporate finance professional with over 30 years of experience. As part of the VERTESS team, I provide clients with valuation, financial analysis, and consulting support. I have completed over 400 business valuations. Most of the valuation work I do at VERTESS is for healthcare companies such as behavioral healthcare, home healthcare, hospice care, substance use disorder treatment providers, physical therapy, physician practices, durable medical equipment companies, outpatient surgical centers, dental offices, and home sleep testing providers.
I hold certifications as a Certified Valuation Analyst (CVA), issued by the National Association of Certified Valuators and Analysts, Certified Value Growth Advisor (CVGA), issued by Corporate Value Metrics, Certified Merger & Acquisition Advisor (CM&AA), issued by the Alliance of Merger & Acquisition Advisors, and Certified Business Exit Consultant (CBEC), issued by Pinnacle Equity Solutions, and Certified Acquisition Integration Manager (CAIM), issued by Intista. Moreover, the topic of my doctoral dissertation was business valuation.
I earned a Doctorate in Business Administration from Walden University with a specialization in Corporate Finance (4.0 GPA), an MBA from Keller Graduate School of Management, and a BS in Economics from Northern Illinois University. I am a member of the Golden Key International Honor Society and Delta Mu Delta Honor Society.
Before joining VERTESS, I spent approximately 20 years in commercial finance, having worked in senior-level management positions at two Fortune 500 companies. During my commercial finance career, I analyzed the financial condition of thousands of companies and successfully sold over $2 billion in corporate debt to institutional buyers.
I am a former adjunct professor with 15 years of experience teaching corporate finance, securities analysis, business economics, and business planning to MBA candidates at two nationally recognized universities.
We can help you with more information on this and related topics. Contact us today!
Owners of healthcare companies are accustomed to creating financial value for their businesses by focusing on the traditional areas of scope of services, client/patient capacity, and revenue streams via reimbursement yield and patient volume.
While revenue growth and operational efficiency are key value drivers for a healthcare company, neither addresses a critical value factor known as company-specific risk (CSR). CSR, also referred to as unsystematic risk, can be understood as risk unique to a company or industry. Differences in CSR are one of the most significant reasons some healthcare firms get top dollar when sold, while others receive a fraction of their potential sale price.
Let's look at five ways healthcare business owners can increase their financial value by decreasing their CSR.
1. Create a fully developed, written business plan
Few small to medium-sized healthcare businesses create a business plan once they are no longer early-stage companies. Instead, they tend to rely on an informal, ad-hoc approach to planning that relies extensively, if not exclusively, on the activities of the business owner(s).
Taking the time to develop a written business plan at various stages of a company's history provides owners and employees the ability to discuss and create a roadmap that supports the owners' business strategy. A detailed business plan also decreases CSR by addressing issues such as:
Where is the business headed?
How will we get the business there?
How much will it cost us to get the business there?
What are competitors doing to keep us from getting there?
2. Establish an independent and engaged board of directors
Since most healthcare company owners are healthcare professionals who have learned how to be businesspeople through trial and error, they are often not accustomed to seeking advice from seasoned business professionals. That explains why some healthcare business owners believe that assembling a board or directors or advisory board will diminish their independence. However, board members can deliver significant value to business owners by sharing competitive insight, acting as a sounding board for new ideas, enhancing access to growth capital, strengthening company credibility, suggesting alliances, and more.
Company boards reduce CSR by providing strategy guidance, thought leadership, and hands-on experience. Viable businesses often have the support of a group of seasoned business professionals who have a genuine interest in the success of the company.
3. Develop a sustainable corporate culture
Many small to medium-sized healthcare companies have a corporate culture that mirrors the personality of the owner(s). As such, the culture may not be well-suited to capitalize on growth opportunities and may not foster a collaborative environment among disciplines and employees. Moreover, the culture may not actively and effectively develop future leaders throughout the company.
Effective corporate cultures help energize employees, attract new clients, improve the effectiveness of managers, and enhance company reputation. Developing a sustainable corporate culture reduces CSR by lessening the impact of high employee turnover, decreasing unethical behavior, and increasing positive employee interactions.
4. Set up an experienced and focused sales team
Few small to medium-sized healthcare companies have dedicated sales professionals on staff. Instead, they rely on generating business through the likes of referrals and company websites. While these are important for a company's growth, the addition of quality salespeople can be a difference maker. The right sales team can solidify relationships with patients/clients, gather critical feedback regarding the company's performance, and gauge and help a business respond to market trends. A quality sales team can reduce CSR by creating a pipeline of new patients/clients, reducing patient/client concentration, and enhancing barriers to competitive threats.
Why don't many small to medium-sized healthcare companies establish an experienced and focused sales team? Some healthcare providers are under the impression that governmental regulators frown on these kinds of activities. Others believe sales efforts are unprofessional in healthcare. Both perspectives are misguided. Larger healthcare companies almost always have a professional sales staff, which can make it difficult for smaller firms without a sales team of their own to remain competitive.
5. Create and adopt a marketing plan
A well-written marketing plan includes the duties and responsibilities of the marketing person or team, a detailed assessment of the target market, competitive analyses, and brand development, among other topics. A fully developed and adopted marketing plan helps reduce CSR by establishing and sharing knowledge of the company's target market and tactical plans to expand market share. Moreover, a marketing plan establishes a foundation for delivering the desired patient/client experience.
Some healthcare company owners believe that when a marketing plan is created, it will eventually collect dust on the shelf and never be reopened. What they fail to realize is that a functional marketing plan is never finalized. The plan should be treated as a living document that changes as the market environment and the company changes. The plan should also be regularly revisited, evaluated, and updated based upon factors including the success of marketing campaigns, identification of new marketing opportunities, and marketing efforts by competitors.
Learning the Value of Your Healthcare Company
Understanding CSR factors and how to mitigate them can significantly increase company value. To gain a better understanding of your CSR factors, learn about the value of your company, and find out ways you can potentially strengthen the value and performance of your healthcare business, reach out to me or any other member of the VERTESS team. We're help to help!
David Coit DBA, CVA, CVGA, CM&AA, CBEC, CAIM
I am a seasoned commercial and corporate finance professional with over 30 years of experience. As part of the VERTESS team, I provide clients with valuation, financial analysis, and consulting support. I have completed over 400 business valuations. Most of the valuation work I do at VERTESS is for healthcare companies such as behavioral healthcare, home healthcare, hospice care, substance use disorder treatment providers, physical therapy, physician practices, durable medical equipment companies, outpatient surgical centers, dental offices, and home sleep testing providers.
I hold certifications as a Certified Valuation Analyst (CVA), issued by the National Association of Certified Valuators and Analysts, Certified Value Growth Advisor (CVGA), issued by Corporate Value Metrics, Certified Merger & Acquisition Advisor (CM&AA), issued by the Alliance of Merger & Acquisition Advisors, and Certified Business Exit Consultant (CBEC), issued by Pinnacle Equity Solutions, and Certified Acquisition Integration Manager (CAIM), issued by Intista. Moreover, the topic of my doctoral dissertation was business valuation.
I earned a Doctorate in Business Administration from Walden University with a specialization in Corporate Finance (4.0 GPA), an MBA from Keller Graduate School of Management, and a BS in Economics from Northern Illinois University. I am a member of the Golden Key International Honor Society and Delta Mu Delta Honor Society.
Before joining VERTESS, I spent approximately 20 years in commercial finance, having worked in senior-level management positions at two Fortune 500 companies. During my commercial finance career, I analyzed the financial condition of thousands of companies and successfully sold over $2 billion in corporate debt to institutional buyers.
I am a former adjunct professor with 15 years of experience teaching corporate finance, securities analysis, business economics, and business planning to MBA candidates at two nationally recognized universities.
We can help you with more information on this and related topics. Contact us today!
A lot of merger and acquisition (M+A) deals fail. That's been the case for a long time. The M+A failure rate that's frequently cited puts the percentage between 70 percent and 90 percent. A Harvard Business Review column largely blames failure on unexpected problems that pop up during the transaction process, which makes the process drag on and eventually motivates the involved parties to go their separate ways.
While unexpected problems contribute to deal failure, I would argue that a growing contributing factor is that buyers are scrutinizing deals more closely with prolonged intentions. That's apparent when we look at how buyers are approaching their quality of earnings (QofE) evaluations.
The Oversized Impact of the Q of E Process
The assessment of a company's value and the facilitation of deal negotiations are significantly influenced by the QofE evaluation. Recent trends in the healthcare industry indicate that the QofE process has become more prolonged due to heightened buyer scrutiny of a company's financials during the due diligence phase, which is creating a challenging and time-consuming process.
As due diligence firms delve even deeper into scrutinizing QofE, as if the small middle-market companies they're evaluating are publicly traded and require such an intense amount of analysis, the duration of the due diligence process extends. Failure to properly oversee this aspect of a transaction may result in disagreements about a variety of transaction issues and lead to prolonged negotiations, highlighting the importance for M+A advisors to adhere to the established protocols and remain open to considering alternative buyers for their clients. This mindset is crucial in accurately capturing the true value of the transaction and preventing wasted time, as extensive delays can jeopardize the success of the deal.
In today's competitive M+A landscape, it has become increasingly common for buyers to unintentionally disrupt a seller's process by moving at a sluggish pace. This can be frustrating for sellers who are eager to close a deal and move on to what's next in their career or begin to enjoy retirement.
Buyers must understand the importance of moving quickly in the M+A process to keep up with the fast-paced nature of the market. If they are unable to do so, they risk losing out on valuable opportunities and potentially hindering the success of the deal. As it is said, "Time kills all deals."
Improving the Likelihood of Deal Success
It is imperative for sellers to be well-prepared before putting their business on the market and initiating the M+A process. This includes getting financials in order, from cash basis to accrual, and we highly recommend sellers complete a QofE on their own company and have this report ready before launching the sale process. Such an initiative can significantly expedite the transaction process and eliminate or at least greatly reduce the level of scrutiny from a buyer's accounting firm.
Pulling off M+A deals, where the rate of success is well under 50 percent, requires extensive careful planning and due diligence, managing risks, and making smart decisions to increase the likelihood of sealing the deal and doing so in a manner that is fair for both parties. In this context, having a proficient healthcare M+A advisor to oversee the process is crucial for sellers, and collaboration with the advisor around preparation is key. Sellers have much at stake and more emotional involvement than buyers. The M+A advisor should prepare them for what's to come and help navigate the seller through the complexities of the deal.
It's worth noting that buyers occasionally attempt to disrupt a seller's process by submitting pre-offers prior to the designated submission date. The rapid acceptance of a preemptive bid by sellers may result in a missed opportunity to gain valuable market insights and enhance bargaining power, which can ultimately lead to a more favorable deal. Insufficient evaluation could potentially embolden buyers to dictate terms during negotiations, thereby endangering the success of the transaction. The M+A advisor must ensure compatibility and diligently adhere to the offer terms, or, alternatively, swiftly transition to the next prospective buyer if necessary.
It's also important for sellers to understand how to best respond to preliminary offers. An offer provided to a seller prior to the company being brought to the market can potentially lead to a protracted negotiation process and limit the number of potential buyers. In other words, a preliminary offer that's accepted by a seller can essentially become a trap if the buyer submitting the offer then takes advantage of a QofE analysis to decrease the value of the offer now that the seller has begun to move forward with the transaction.
During a market sale, it is advisable for an M+A advisor to utilize any preliminary offers to effectively manage the transaction timeline and better achieve the objectives of obtaining the best value, fit, and terms for the seller's company.
In addition to the importance of thorough preparation and clear communication, it is also essential for all parties involved in healthcare transactions to maintain transparency throughout the process. By being open and honest about expectations, goals, and concerns, potential pitfalls can be addressed and mitigated early on. Such a level of transparency can build trust and collaboration, make the transaction process less daunting, and lead to a smoother transaction and more successful outcome for the parties.
Anna Elliott CM&AA
With over 15 years of experience in healthcare technology, post-acute care, hospice, and urgent care, I am a highly experienced healthcare executive. I have successfully supported numerous private equity roll-ups and exits in the home healthcare sector. My extensive knowledge of the healthcare industry and my leadership in the M&A community, as a certified M&A Advisor (CM&AA) and member of the Executive Committee of the Chapter of the Association for Mergers & Acquisitions Advisors (AM&AA), distinguish me from others in the field.
Throughout my career, I have specialized in healthcare and have excelled in attracting healthcare technology firms and industries that are growing through Mergers + Acquisitions. I have a strong ability to target specific needs and opportunities in the business supply and demand process, resulting in over $150 million in value delivered to organizations.
As a co-founder of M&A Finders, a boutique Merger and Acquisition advisory firm in Pittsburgh, I have been able to pursue my passion for advocating on behalf of buyers and sellers in achieving their M&A goals. I am excited to bring my skills and network to VERTESS, where I have access to the necessary resources to further expand my impact in the healthcare industry.
We can help you with more information on this and related topics. Contact us today!
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