Executing A Sale: Private Equity, Search Fund, and Strategic

Volume 11, Issue 15, August 13th, 2024

By: Alan Hymowitz, CM&AA

Last year, I wrote a column on "Choosing a Buyer: Private Equity vs. Search Fund vs. Strategic." As the title would suggest, this well-received piece discussed the three predominant buyer types — private equity group (PEG), search fund, and strategic buyer — healthcare business owners are likely to encounter when they decide it's time to sell their company and what sellers should know about them. I have had the good fortune of closing deals with each of these buyer types over the past few months, so I thought it would be worthwhile to do a follow-up piece to this column — one that discusses the challenges associated with getting transactions involving these buyers to and across the finish line.

Each buyer type has its own challenges, and understanding how to navigate them most effectively and efficiently is one of the most important roles I play as a healthcare M&A advisor. As I collaborate with seller clients to overcome these roadblocks and any curveballs, I am focused on achieving not only the best valuation for clients but also the deal structure that would most benefit them. Understanding how buyer types differ in how they structure offers and prefer to proceed through the due diligence phases is essential to achieving a seller's goals and ultimately a successful transaction and transition.

Let's take a closer look at each of these three buyer types and key points to know about their acquisition approach.

Private Equity

PEGs are also referred to as financial buyers. As this name suggests, their approach is largely based on a healthcare company's financials. Broader due diligence focuses primarily on intense auditing of documents like profit and loss (P&L) statements, balance sheets, and bank statements for the trailing 12 months up until 30 days prior to close. 

Legal due diligence will focus on areas like contracts, state boards, and regulatory issues. Sellers should expect weekly due diligence calls with a PEG's legal, tax, regulatory, management, accreditation, licensing, and human resources representatives, and must be prepared to answer their questions and produce any documents requested. At closing, other legal steps must be completed, such as a reorganization.

The deal structure will likely include shared risk, rollover equity, non-competes, earnouts, and employment agreements. Given this continued involvement from ownership, it is worth noting that PEGs used to largely approach acquisitions with a 5-7-year turnaround plan. That plan can now last longer, even surpassing 10 years.

A PEG is more likely to desire keeping the existing management team in place, unless a necessary change is identified during due diligence.

Search Fund

Also referred to as unfunded sponsors, search funds take a "buy-and operate" approach to acquisitions. This translates to current owners usually only remaining for a short consulting period post close.

Search funds come to transactions with previous and fairly extensive knowledge about the company's sector and what's required for success within it. These buyers focus less on financials and the likes of P&L and balance sheets. They look for profitable companies with strong potential growth and return. These are important given that search funds usually have no growth capital, which places greater emphasis on current and potential legacy growth.

Search funds tend to require strict non-competes and expect that current, essential staff will remain with the company while also usually turning over upper management. Scrutiny and audits of an acquisition focuses on regulatory issues, changes of ownership (CHOWs), and any legal issues past and present.

Following the signing of a letter of intent, search funds work to secure funding for the acquisition. The capitalization table (i.e., cap table), which shows a company's ownership structure, will change daily or weekly depending on what's discovered in due diligence up until the day a transaction closes. Each search fund investor has its own requirements.

Finally, search funds tend to hold onto assets longer than PEGs. 

Strategic Buyers

These are typically what are referred to as "non-financial" (to contrast PEGs) or "buy-and-build" buyers. They tend to already be well-established in the industry in which they are pursuing an acquisition. Thus, they come to the transaction table with vast knowledge but not necessarily the personnel, so they tend to need the talent and resources that come with the acquisition. 

As the descriptor of non-financial buyer suggests, strategics are less focused on financials of the company. Rather, the acquisition is motivated by one or more of needing the acquisition's location, talent, contracts, or customers, or a desire to eliminate a competitor. Strategic buyers also view acquisitions as a way to pursue and further achieve economies of scale.

Strategic buyers tends to have a shorter due diligence period than the other buyer types.

Private Equity, Search Fund, and Strategic: Completing Your Sale

If you're operating a good company, finding interested buyers is usually easy. What comes next is much more difficult, which points to the value of working with a healthcare M&A advisor, like those at VERTESS. Determining a desired exit strategy and optimal buyer type, bringing a company to market, attracting the right buyers, properly vetting buyers, selecting a buyer, and finally navigating the subsequent transaction processes all include challenges that can derail an optimal and successful outcome.

The VERTESS team is comprised of advisors with extensive experience operating healthcare companies and working with all buyer and seller types. We support clients through the entire M&A process and beyond, which includes helping clients achieve a smooth post-transaction transition.

Reach out to learn more about how VERTESS is helping business owners like you achieve successful sales.

Alan Hymowitz, CM&AA

During the past decade I have facilitated numerous, diverse M+A transactions in the pharmacy marketplace across the country, as well as providing strategic consultation to national pharmacies and similar organizations. Prior to becoming an M+A advisor, I was a “hands on” owner and manager in the pharmacy and home infusion healthcare marketplace for over 15 years, and successfully sold my pharmacy to a national company after growing and diversifying our income streams in a very competitive market. My specialties in the pharmacy and home infusion marketplace include long term care, retail pharmacy, specialty pharmacy, and home healthcare, and I have attained the URAC Accreditation and Specialty Pharmacy Consultant designations, in addition to other recognition. My educational background includes a Bachelor of Arts from Rutgers University and a Master of Arts from the John Jay College of Criminal Justice.

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