My educational and professional experiences have demonstrated to me the importance and value of early intervention, both in medicine and in business. I received my nursing training in the Houston Medical Center at Hermann Hospital, Methodist Hospital, and MD Anderson Cancer Center. I later went on to launch numerous medications at some of the world's largest pharmaceutical companies. As a Managing Director at VERTESS, I try to apply the concept of early intervention to mergers and acquisitions (M+A).
We know early intervention is paramount for long-term clinical outcomes. The sooner we know someone has a condition like diabetes or chronic obstructive pulmonary disease (COPD), the sooner we can act on the knowledge by making timely decisions that can help get the disease under control and improve one's quality of life.
I wanted to share a little about my background because this column speaks to what I've learned from my clinical experience and what I learned from M+A work and how they relate, specifically regarding the concept of early intervention.
On the transaction side, we know early intervention for exit planning is important for outcomes as well. Most owners of middle market companies tend to start planning their exit years in advance. In sharp contrast, we often see the owners of lower-middle-market healthcare businesses wait much longer to start their exit planning, which can lead to less desirable outcomes.
Here are five reasons you should intervene early when it comes to planning for an exit.
1. Selection of an M+A advisor. One of the first steps you will want to take as you begin work on your exit planning is to choose a healthcare M+A advisor. This is a decision you do not want to rush as the individual/firm you choose will play a significant role in helping you effectively prepare for and execute your sale. Starting your research into an advisor early will give you adequate time to perform your due diligence and make an educated decision.
Earlier selection of an advisor also builds in more time for the advisor to perform several key tasks essential for transaction success. This includes completing an initial assessment of your business and its operations, which will allow you to better understand your strengths and weaknesses. With this information, the advisor will work with you to identify the best opportunities for improvement that can help attract more interested buyers resulting in a higher enterprise value.
The information gathered through the assessment will also enable the advisor to establish the valuation range for your business and then provide guidance as to what you can do to increase the valuation or better ensure and secure a higher valuation.
Finally, early selection of an advisor builds in more time for you, the advisor, and other members of your transaction team (e.g., accountant, lawyer) to complete the steps required to bring a business to market.
2. Improved enterprise value. At VERTESS, we frequently encounter owners who suddenly decide "today's the day" to step away from their company. This rarely bodes well for an owner interested in maximizing the value of their business. It's akin to a patient who smoked for 25 years suddenly deciding to stop smoking after being diagnosed with COPD and being placed on oxygen.
For example, a recapitalization can be a great way for owners to take chips off the table, but it requires patience and long-term planning. With a recap, owners are paid a portion of the company's value at close and then roll a portion of the equity (i.e., hold a minority percent of the stock in the company). If an owner can stay on and remain active with the company, when it's sold again (usually within 5 years or so), the second payout is typically as big (if not bigger) than the initial bite out of that apple even though it's for a minority percentage. The second bite out of the apple is usually much bigger than the first, but this all takes planning.
3. Mitigating risk. Early clinical intervention greatly improves the risks associated with almost any disease. Similarly, early transaction intervention helps address risks that can turn buyers away or reduce enterprise value.
A common transaction risk is the impact of an active owner leaving the company. If the owner plays a key role in securing referrals and maintaining referral relationships, a prospective buyer may have concerns regarding the owner's exit. Leadership succession planning is critical. It often takes time to find the right operator and train them to fill the numerous role(s) many owners often perform. Buyers prefer a strong leadership structure, which ensures future revenues are not impacted by an owner's exit.
Subcontractors have been known to be viewed as a risk by prospective buyers. Usually having a few subcontractors is not an issue. However, if "subs" make up more than 50% of the workforce, it can become a greater concern. Subcontractors are viewed as having significantly reduced "stickiness" to the organization. With more time, an owner can either work to convert subcontractors to employees or hire staff to take over the work performed by subcontractors. Replacing subcontractors with full-time staff may initially hurt the bottom line, but it's going to greatly improve the company's overall value. Buyers don't just buy companies; they buy the employees too.
4. Drive valuation. Early transaction intervention affords owners and leadership more of their most precious commodity: time. With enough time, we at VERTESS can guide sellers to achieve their desired transaction number or a figure that's as close to that number as possible. Together, we can work to take targeted efforts toward increasing your multiple. This is work that tends to require time, but it is an investment that can truly pay dividends.
Buyers usually see through efforts to inflate addbacks and EBITDA. It's our job as advisors to provide guidance along the path to a realistic representation of your company.
5. Smart tax strategy. Clinical interventions that occur later in disease progression tend to be costly, for both the patient and insurer. The same can be said for late transactional interventions related to taxes. Taking a company to market brings with it considerable tax concerns. However, if we're able to intervene early, we can help put mechanisms in place to mitigate these tax risks, thus allowing you to hold on to considerably more cash at close.
Start Your Exit Planning Now With VERTESS
As a healthcare-focused M+A firm, VERTESS helps business owners effectively execute the sale of their company. We collaborate with owners to define clear objectives, develop a comprehensive plan, craft a winning strategy, and maximize results. If a sale of your company is on the horizon — even if that horizon may be a few years out — please contact us. We would welcome the opportunity to help you understand the value of your business and how we can work together to make sure you earn the highest return on the investment you've made in your company.
David Broussard RN, CM&AA
My first job was working for my family’s home health agency in League City, Texas. I started in the file room and worked my way up to patient scheduling and, finally, strategic planning before my family successfully sold our sizable business.
I did my nurse’s training in the Houston Medical Center. It was during my training at Hermann Hospital, Methodist Hospital, and MD Anderson Cancer Center where I had the opportunity to learn from some of the finest clinicians in the country and my passion for treating patients was cultivated.
Prior to working with VERTESS, I strategically lead sales planning initiatives for organizations such as GlaxoSmithKline, Novartis, Bristol-Myers Squibb, and Astra Zeneca. I’ve launched numerous blockbuster medications that have made significant differences in many patients' lives. This experience has given me a unique understanding of contractual arrangements and the impact managed care and government payers can have on the overall well-being of a company and/or industry. In my 20 plus years of experience in pharmaceutical sales, I won numerous national awards with four of the top pharmaceutical companies in the world.
As I know from personal experience, the road to a successful transaction can have twists and turns. In previous positions, I spent a great deal of time analyzing data to strategically grow our market share. In my role at VERTESS, I am taking that same data-driven, research-based approach to best help healthcare entrepreneurs understand their options in the marketplace and assist them in reaching their goals.
We can help you with more information on this and related topics. Contact us today!
by David Broussard, Robert Villalobos, and Rachel Boynton
Is your healthcare organization thinking about focusing on acquisitive growth? Before you go all-in on the strategy, read on. This column will help you gain a better understanding of the strategy's defining qualities and what is typically required for success.
Active vs. Passive Buyside Engagements
There are two types of buyside engagements: active and passive. Active means a mergers and acquisitions (M&A) firm is proactively searching for potential acquisition targets for a buyer. This engagement typically carries with it a monthly fee. Passive means the M&A firm does not commit ongoing time and resources to seek out acquisition targets. While there is typically no monthly fee associated with passive engagements, this approach brings with it a potentially significant downside. Active engagements usually result in more acquisition targets and, more importantly, better quality opportunities, making it a win-win for the buyer and its M&A firm partner. With passive engagements, opportunities may be few and far between.
Finding the Perfect Fit
When we work with buyers, one of the first exercises we undertake is identifying what type of platform or strategic tuck-in the buyer is looking for and why it will be the right fit for the organization. Here are some key areas we focus on as part of this exercise.
Target acquisition parameters
There are a few target parameters we typically prioritize.
Size — When we work with organizations growing through acquisition, our first goal is to identify how small or large a target needs to be for there to be an appetite for our client. Annual revenues, EBITDA margins, and market growth potential matter greatly when identifying potential acquisitions.
Location/geography — Next, we determine what location(s) for the acquisition target will best support the buyer's acquisition goals. Will this acquisition fill a needed footprint logistically? Is it close enough to existing infrastructure that can help expansion efforts? Will the buyer gain access to new contracts, a new market, and/or key management? Is the buyer looking to acquire a local competitor and thus become the dominant provider in that market?
Growth potential — Finally, we consider the growth potential of an acquisition. Will there be extensive growth opportunities for the market the business is in or has the company reached a plateau for its market share? We recently worked with a physician group that had gained control of 70% of its market share. This hindered the group's ability to find buyers that did not already have a similar platform in their portfolio. One way to look at growth is to consider past performance and measure it with internal models and synergies to see how well the business could perform from day one of an acquisition.
There are other important factors that come into play when developing an acquisitive growth strategy, including the following:
Funding sources — Business owners are eager to learn how a potential acquisition of their company may be sourced. What will it look like on paper? What is the structure? It is pivotal as a buyer to be transparent concerning how the deal will get funded. Is it 100% cash at close (which sellers love), leveraged debt, or perhaps a mixture? There is no right or wrong funding path to pursue. More importantly, a buyer with a reputation and history of successfully closing transactions will almost always win over a seller, even if the buyer may not have the highest bid. There is tremendous value in such a track record.
Integration strategy — The single most important factor post transaction for an acquisition — for both the buyer and seller — is integration strategy. While there is no one-size-fits-all approach to integration, a good strategy is to outline past successes with specific examples of what integration will look like and what a seller should expect for themselves and their employees.
Buyer and Seller Expectations
What else do buyers and sellers need to understand when weighing an acquisition? Here are some important considerations.
For buyers
Know what you're looking for — It's important that you know exactly what type of platform you're looking for. As discussed, qualities to consider include target revenue size and desired location. Growth through acquisition can often be a fruitless endeavor requiring many man hours and resources to simply find companies appropriate as tuck-ins or bolt-ones for parent organizations. The right strategy and partnerships can help maximize efforts and often lead to the successful execution of acquisition goals.
Be more than opportunistic with your offer — It's a competitive market out there.
Ask questions up front — It's important to let the seller know that you'll be asking a lot of questions upfront so you can provide the best offer.
Get the information you need — Make sure you have obtained all the details required so you can feel confident that you are making a fair, aggressive offer.
Know that you're not alone — If a seller is talking to you, they are most likely having discussions with other buyers.
Buyers need to be aware that many sellers know they're able to significantly increase their sale price by running a full limited auction process, which is one of the main reasons buyers must be aggressive with their offers. The most successful companies looking to grow through acquisition appreciate not being placed in a limited auction process. Thus, they are willing to pay more for a company because it's still likely less than they would pay if they were to go through the limited auction process to acquire that same company.
For sellers
Find appropriate legal representation — Any M&A advisor would be remiss if they did not encourage the seller to retain appropriate representation from an attorney specializing in healthcare M&A. This is not a job for a family attorney. The transaction process tends to last 6-9 months and negotiations virtually never cease during that time frame. Having the right coach in a seller's corner matters.
Pay no M&A fee — Sellers should not incur a fee from the buyer's M&A advisor.
Appreciate value as a bolt-on — It's also important for sellers to know that there is great value in being identified as a target bolt-on. The primary benefit is that those companies will not pay the fee for the buyside agents which ultimately connect the buyer and seller. It is in a target bolt-on's best interest to be open to potential conversations. At a minimum, such sellers can walk away with a better understanding of the market appetite and how strategic buyers are valuing organizations similar to theirs.
Choosing the Right M&A Partner
When it comes time for your organization to pursue an acquisition, you might need help finding the optimal fit. There are M&A firms available and willing to help you. Many specialize in various sectors, such as oil and gas, automotive, hotel restaurant management, and, of course, healthcare. That specialization matters significantly.
M&A firms can spend numerous hours in search of companies that could be a perfect fit for the buyside client and yet nothing culminates and moves into the transaction phase. It's important that you employ a healthcare-focused M&A firm and one that is suited to appropriately support your organization's needs and goals. The right M&A firm will have access to countless company revenue statistics and know what methodologies to leverage to contact business owners and leaders who may be good acquisitions targets for your organization.
Aligning a buyer and seller with the overall structure of a deal, whether it be a minority recap or full-blown exit, is just one of the key components for transactions success. Personality, overall methodology, beliefs around managing people, and a solid plan for continuing forward with a healthy culture will increase the odds of a successful transaction dramatically. The right M&A firm can help ensure an acquisition is successful and both sides of the transaction end up satisfied with the outcome.
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