Guide to Closing a Private Equity Transaction

Volume 10 Issue 10, May 9, 2023

The process of selling your healthcare business or attracting investors is often referred to as “selling your baby,” reflecting the very personal nature of this important business transaction. While each transaction is unique, we have identified 20 attributes that determine the probability of successfully completing a transaction.

We’ll review these attributes below and touch on what you can do to improve your probability of closing. Note: Read to the end to learn about how you can access a tool that will help you conduct a self-examination to determine the probability of closing a transaction involving your business. 

1. Owner commitment 

The level of owner commitment to sell their business is a key attribute in determining the probability of closing. The most common reasons owners decide to sell their business are retirement, burnout, divorce, illness, relation/lifestyle changes, poor company performance, industry or competition changes, reimbursement changes, partner disputes, and various financial reasons. Of these listed reasons, retirement, burnout, and financial reasons — most notably a desire to recapitalize the company — are the top three reasons an owner chooses to sell their “baby.”

Owners seeking retirement or suffering burnout or illness typically have a high level of commitment to sell, whereas owners wishing to recapitalize, going through a divorce, or having partner disputes have a medium to low level of commitment to sell.

Commitment is keenly important as the sale or transaction process is long and difficult. All parties to a transaction must be willing to work diligently to reach a successful closing. 

2. Giving up control

The owner’s willingness to hand over the reins of their company to a buyer is often challenging. As owners, you’ve grown accustomed to calling the shots. You know the value of controlling the company derives from the fact that you believe that you operate the firm differently — and better — from the way others would. It’s a difficult decision to hand your baby over to others. However, once you’re committed to selling your company, you must also commit to giving up control. 

In the past, we’ve seen sellers sabotage the success of a transaction because they could not emotionally relinquish control. Sellers must envision the company prospering under new leadership. This is especially true for recapitalizations, where the owners stay on as minority owners post-closing. Our advice is to choose a buyer that gives you confidence in their ability to successfully run the company post-transaction. 

3. Realistic expectations of value 

Skilled M+A advisors who genuinely understand your industry and are experienced selling firms of your size will have keen insight as to the amount buyers are willing to pay for your company. The value of your business, in the eyes of buyers, is based on risk and reward and current market conditions. 

Moreover, the perceived value of your company is based, in part, on the number of similar companies in the M+A marketplace. Buyers will ask themselves why they should pay X dollars for your company when there are several other similar companies that they can acquire for Y dollars.

A major challenge for some sellers is getting a realistic expectation of value when their company is experiencing above-normal growth. We heard owners say, “If I just wait one more quarter…” as they pondered the estimated market value of their business. We call that thinking “chasing rainbows.” We’ll often tell owners that the best time to sell a growing company is “never” because they’ll always feel that they’re leaving money on the table. The real answer is that you should sell your business when you’re ready to do so. 

4. Personal financial readiness

Financially speaking, there are two types of business owners: those who depend on the proceeds of the sale of their business to meet their long-term financial goals and those who are not relying on that income to meet their financial goals. Most of our clients fall into the former category. As such, those owners want to know if the after-tax proceeds from selling their business are sufficient to provide them with their desired lifestyle post-transaction.

Before taking on a new client, we at VERTESS undertake a market valuation of their company. Providing owners with an expectation of value for their business provides them with an opportunity to determine if the sale proceeds would meet their financial needs going forward. 

Occasionally, we’ll have owner clients who hope the final purchase price exceeds our expectations of value. Most of those circumstances lead to unsuccessful transactions as the gap between buyers’ offers and seller’s pricing needs is too great to close. 

5. Degree of flexibility 

Flexibility is arguably a key attribute for owners looking to sell their businesses. Since there are many variables concerning the sale of a business, being flexible allows buyers and sellers enough latitude to negotiate a final agreement. An inflexible owner allows little space for negotiation, usually leaving prospective buyers frustrated and inadvertently sabotaging what could have otherwise been a successful transaction.

We’ll often hear a seller say, “That’s a deal breaker,” regarding a buyer term or provision. It’s been our experience that calm, steady, persuasive, and intelligent negotiations can overcome any “deal-breaker” provision.

Also, owners should be willing to negotiate on price. At the end of the day, the marketplace will determine the value of your business. There are many reasons why business owners may fail to receive the price they want for their business. One way to mitigate this problem is to work with a skilled M+A advisor to address pricing issues early in the transaction process so these issues are minimized or eliminated. 

6. Information request responsiveness 

A key reason for unsuccessful transactions is loss of momentum due to unresponsive sellers. When owners do not promptly respond to information requests, buyers wonder if the owner is either ineffectual or getting cold feet. 

M+A transactions have a certain timing and rhythm. Serial buyers are profoundly aware of typical information turnaround cycles and will raise concerns early on when owners are unresponsive. Buyers want to be assured that the seller is committed to completing a successful transaction or they will go and find a seller with the right level of commitment.

7. Low owner reliance 

Businesses that rely on the owner’s day-to-day engagement in the operations and growth of the organization have high owner reliance. Have you ever realized that it’s impossible for you to take a day off without feeling like the business will fall apart without you? If so, your business may have too much reliance on you. 

Buyers are acutely aware of the negative effects of too much owner reliance, where employees are worried about making decisions without your input. Identifying and developing future leaders in your organization helps create long-term sustainability and frees you up to focus on strategic matters that create value.  

8. Sound historical performance 

A business with an ongoing history of positive financial performance over the past three to five years indicates a relatively low-risk organization. Similarly, companies with a history of meeting or exceeding industry growth and profit margin are an indication of a well-run business.

9. Good current performance 

Interestingly, a company’s current or recent financial performance is one of the most important indications of sound financial performance to buyers. Financial performance is a complete evaluation of a company’s overall standing in categories such as assets, liabilities, equity, expenses, revenue, and overall profitability. It is measured through various business-related formulas that allow managers and investors to calculate exact details regarding a company’s potential effectiveness in creating value. 

10. Positive expected future performance 

The reality is that buyers are acquiring a company’s future performance. Companies with a seemingly bright future will attract solid offers. Curiously, however, companies with “too-good-to-be-true” projections of future performance will often scare off potential buyers because of skepticism concerning such rosy prospects. 

11. Few personal expenses in P&L 

We often find ourselves looking at seller profit and loss (P&L) adjustments made to earnings before interest, taxes, depreciation, and amortization (EBITDA) on a business for sale and saying, “What in the world are they thinking?” 

Although legitimate adjustments can be perfectly acceptable, owners that run excessive personal expenses through their business that would not be assumed by a future owner (e.g., fun trips, memberships) cause concern among buyers. Sometimes, family members are paid far-above-average salaries and will not continue with the company. 

On justifiable adjustments, you’ll hear no contest from us. However, just because adjustments are justified doesn’t mean they’ll leave a good impression on investors. We recently saw a business barely breaking even with a sizable adjustment for private air travel. Such adjustments speak volumes about an owner’s priorities.

12. Excellent bookkeeping and accounting records 

Having well-prepared financial reporting allows owners to better prepare for making sound financial decisions to grow the business. Moreover, improved financial management allows you to focus on current financial matters while developing improvement and growth plans. Inaccurate financial statements will be discovered during buyer due diligence and lead to a lower valuation or lost sale.

13. Low employee turnover 

Business owners who focus their efforts on building employee engagement can create a positive working atmosphere, give employees a sense of pride in their work, and encourage people to remain with the company, avoiding the negative impact of significant staff turnover. Companies with relatively high turnover (i.e., above the industry average) will cause concerns from buyers and ultimately increase the perception of a company's riskiness. 

14. No supply chain issues 

Healthcare companies faced unprecedented supply chain upheavals over the past several years due to a confluence of events from the pandemic to geopolitical tensions. The result was significant, ongoing disruption to global supply chains. 

Companies that have taken steps to mitigate past supply chain issues are better able to return to normal vendor supply delivery terms. Those companies that continue to face supply chain headwinds will find buyers hesitant to make quality offers or finalize the transaction process. 

15. Due diligence support 

We’ve seen occasions where a seller elects to “go it alone” through the due diligence process. Due diligence is a process or effort to collect and analyze information before one decides to proceed with or conducts a transaction. Due diligence helps ensure one party is not held legally liable for any loss or damage and the other party knows what they’re buying.

Common consequences of a go-it-alone due diligence strategy are it slows the due diligence process, takes owners away from running the day-to-day operations of their company, and leads to seller and buyer fatigue. As such, it’s best to put together a due diligence team to run the process. 

16. Using a seasoned M+A attorney 

Nothing creates more stress on a transaction than either party being represented by a non-M+A attorney. The legal ramifications of an M+A transaction are unique. Negotiating M+A transaction terms is a critical piece of any acquisition/sale. Experienced healthcare M+A attorneys know what terms they need to focus on to structure the best deal for you. Inexperienced or non-M&A attorneys, on the other hand, might not push hard enough on critical terms and too hard on non-critical ones, wasting considerable time and effort while creating unnecessary deal fatigue.

17. Not micromanaging the process 

Micromanaging is someone trying to personally control and monitor every aspect of a team, situation, or place. Micromanaging leads to seemingly countless deal revisions requested, status reports being demanded more often than necessary, and an apparent lack of trust in other members of the team to get on with their work and do their jobs. 

We’ve witnessed firsthand the negative effects of a micromanager seller, including several unsuccessful transactions where the buyer walks away frustrated and exhausted. Owners are much better off hiring seasoned professionals and letting them do the heavy lifting. 

18. Expectations of a clean QoE report 

The quality of earnings (QoE) report is a routine step in the due diligence process for private acquisitions. Reported net income is not necessarily a 100% accurate indication of financial performance for a business. If a company uses generally accepted accounting principles, has accrual basis financial statements, and keeps its bookkeeping current, it should expect a clean QoE report. To learn more about QoE reports, read one of our related articles here.

19. Expectations of a clean due diligence process 

Sellers who feel confident that the due diligence process, including legal review, will not uncover any deficiencies need not worry about buyer repricing or having an unsuccessful transaction. On the other hand, when due diligence leads to the discovery of non-compliance regarding the Anti-Kickback Statute, Stark Law, and potential healthcare fraud and abuse issues, buyers might terminate the transaction process.

20. Choosing the right healthcare M+A advisor 

It’s imperative to work with a healthcare M+A advisor who keenly understands your business, the industry, and the marketplace of potential buyers and has a proven record of completing transactions similar to yours. With the right M+A advisor, the probability of a successful transaction increases significantly.

Will You Have a Successful Healthcare Transaction? 

Imagine if you had an opportunity to conduct a self-examination of the attributes listed above, applied to your situation/healthcare business, to determine the probability of closing your transaction. We’ve made that possible by providing you with a downloadable scoring spreadsheet, which can be accessed at Will You Have a Successful Healthcare Transaction. 

Fill out the checklist and then reach out to let us know how you scored. We’ll happily talk through your score and offer suggestions on what you can do to further strengthen the likelihood of a successful transaction in your future.