Volume 9, Issue 12, June 7, 2022
Two of the most frequent questions sellers of healthcare businesses ask VERTESS Healthcare Advisors are, "What can go wrong? How can I prevent my deal from falling apart?" Some deals are simply destined to fail, whether it be because a buyer or seller changes their mind or the parties come to an impasse. But then there are those potential deal killers that can be avoided.
Based on some recent experiences, my colleagues and I have compiled 10 reasons deals have had the potential to fall apart and offer recommendations for what you can do to reduce the likelihood that your deal experiences an unfortunate ending.
Wrong lawyers — It can't be stated enough how important a trusted and knowledgeable lawyer is for a deal to be successful. I recently worked with a team that used their trusted lawyer. However, this attorney had little experience in healthcare M+A. Even worse, he felt he knew the business better than the owner. This belief became a problem when the owner agreed to conditions with a buyer, but the lawyer disagreed with the arrangements — and the seller could not convince the attorney to change their perspective. Our deal almost died because the lawyer wanted to continuously negotiate points that the seller had already settled with his team.
It is important to listen to the advice of your lawyer, weigh your options and risk tolerance, and then make a decision that is best for you as the business owner (seller) and the deal you are negotiating. An experienced healthcare M+A lawyer should understand the particular deal components that are standard versus what areas to push back on. They should know the nuances of state and federal licensure requirements and exposure potentially facing a seller. A great lawyer will also know what to hold firm on and what battles are not worth fighting.
Poor vetting of buyers — It's not uncommon to see a buyer submit a letter of intent (LOI) that essentially locks down the seller and gives the buyer exclusivity to information. The seller might get a great offer from a buyer in an LOI, but this is not a binding contract. An offer often changes once a buyer finds reasons to lower a price.
This is why we often tell sellers that it's usually not difficult for anyone to find a buyer; however, finding multiple qualified buyers who will be honest with their offers is more of an art. We work to secure several offers for the organizations we represent. This way, we can work to determine which buyers are likely to be more trustworthy with their offers and which are likely to re-price or change expectations. With this information, we can better advise them on which written LOIs are worth considering. Although, as previously noted, these written offers are not legally binding, they should act as a "handshake" that outlines the key components of a deal that helps the seller find the best offer for them and do so without surprises.
Weak company representation — During the selling process, an owner has many opportunities for conversations with the buyer between the initial introduction to the final closing. Remember: A buyer is usually not simply purchasing a building but all the innerworkings of an organization. A company's projected, future success under its leadership is likely one of the reasons for the buyer's large investment.
A buyer will want to not only talk with the owner/seller but eventually some of the key leadership that will remain following completion of the transaction. During this process, it's important for everyone representing the seller's business to put their best foot forward. If a buyer doesn't care for the employee helping to communicate information, the buyer will be unlikely to keep this team member on post close. Worse, if communications with owners and staff are poor, the buyer may pull out of the deal. Buyers are looking for quality organizations. How a seller and their staff represent themselves during discussions with a buyer can be a deal killer.
Non-alignment — One of the first things that I will ask a seller about is their motivation for selling. Some people simply want to cash out, but most want a caring and innovative buyer (and leader) who will take their organization and staff to the next level. In these scenarios, the buyer is just as important as the money offered.
If this expectation is not discussed in the beginning and the level of its importance is not established for the buyer, a deal can fail. Many sellers will pull out of a deal when they see that a buyer's only motivation and concern is solely financial. Both buyer and seller need to be aligned and have respectable chemistry to make a deal successful.
Dishonesty — The diligence process is the most arduous of the selling process. Between the data collected and time spent gathering information, every secret a seller might have will likely be discovered. If a buyer learns of secrets through the due diligence process, it will often pull out because of a lack of perceived trust and integrity.
Additionally, if there is anything withheld and the contract is signed, a buyer will still have protections and the ability to go back to the seller for damages/expenses for what is perceived as a fraudulent deal. For example, some sellers may be struggling financially but try to hide that from a buyer. Such struggles will likely be discovered and could jeopardize a deal or see a buyer seeking significant damages. By working with the right M+A advisor, these issues can be explained and addressed from the beginning. This may help a seller achieve a successful transaction before they need to close the doors.
Lack of prioritization — We have an expression that "time kills deals." This is because a lot can go wrong when running a business, and some of these events can change interest in a deal. When we sell a business, it is based on past performance and the potential for an amazing future. What this means is that during the selling process, we need a seller to be as engaged and available as possible.
Running the business should always come first, even as a company is working its way toward a transaction. However, an owner or leader taking extended vacations or simply being unavailable during crucial times like management calls or diligence can cause significant slowdowns. Slowdowns typically create a longer process. A longer process provides more opportunity for things to go south.
Lavish spending — When a company goes to market, we work carefully to present realistic financial information to our buyers. We are also very purposeful in removing owner expenses or extraneous business expenses to get the best bottom line that we can for our seller. This translates to a higher offer.
Once an offer is received and the seller is under an LOI, it's important to retain the level of spending and attention to the bottom line. This is not the time to give organization-wide raises or purchase a piece of unnecessary equipment. Such diversion from the financials originally offered will often result in a smaller profit and usually lead to an adjustment in pricing, which often then kills a deal.
Overlooking the fine print — A purchase agreement has many small details. If these aren't addressed from the start, it can result in a seller pulling out of the deal. Examples of such details include deal structure, stock versus asset deal, tail insurance, working capital adjustments, caps and buckets, and non-competes. These should all be reviewed and agreed upon well before closing since all these items will cost the seller money. I recently had a deal almost fail because of the cost of tail insurance that was not anticipated by the seller.
Now for a few other deal killers from my colleagues.
Shifts in strategic direction — In the substance use disorder treatment (SUD Tx) world, we're seeing significant shifts in the trajectory of the industry occurring almost annually. These days, shifting has a lot to do with fears and hype around how and when to start negotiating new, value-based care reimbursement contracts with payors. This is causing leadership to examine their continuum and quality of care.
Some owners were stringently opposed to medication-assisted (MAT) just a few years ago and are now not only "MAT friendly" but opening office-based opioid treatment (OBOT) facilities of their own. Some are even opening their own opioid treatment programs (OTP).
At any rate, the hype around these value-based care contracts seems to be causing leadership to change their continuum or seek acquisitions to insulate their population health management. As a result, they are changing their minds on strategic direction quite frequently. Constantly changing strategic direction for the company is not only poor for operations, but it kills deals. Adding a new residential program, winding down a partial hospitalization program (PHP), or launching a new detox facility can all be great initiatives, but they might change the profile of the company a buyer originally intended to acquire.
As long as these strategies and significant decisions are communicated to a buyer ahead of executing an LOI, they can potentially be value-adds to the buyer's perspective. However, changing the profile of the company after signing an LOI and without previously communicating your intentions and strategic direction to your buyer can — and often does, in my recent experience — implode the transaction. — David Purinton
Failure to maintain performance — Buyers often insist on businesses they're acquiring to maintain their operations through the close date. This is often stated in the LOI. There will be a clause requiring the business to continue to generate the same revenue and profits (EBITDA, in most cases) all the way to close. This can be a challenge for owners because of the significant time and energy required to get through diligence. The time and attention required in diligence can distract owners and their management teams from attending to their business.
If the results falter before a deal is closed, a buyer can and often does try to reprice the deal (i.e., lower the price). Alternatively, the buyer can use an earnout. The idea here is that the buyer lowers the price but promises to make that up after the close if the business hits certain thresholds (revenue and EBITDA). That puts the risk of getting paid on the seller and is based on the buyer operating the business and achieving those goals.
Unfortunately, with a change in the deal structure, some sellers will decide not to proceed since the value of their company has now changed and they are being offered less money. Getting successful transactions done isn't simply about running an auction process and knowing the buyer. For an M+A advisor, it's about managing a hundred details and supporting sellers every step of the way. — Dave Turgeon
While no advisor has a crystal ball and can avoid every pitfall, many of us have experienced firsthand the things that can kill a deal, and we work hard to plan ahead to avoid them. Securing the right M+A representation — one with healthcare transaction experience in your industry — can be the difference between a smooth, quick deal and one that doesn't reach the finish line.
As Co-Founder of LifeShare, a multi-state human services and healthcare organization, Rachel has a unique background of over 20 years of successful operational and executive experience, in addition to an MBA in Healthcare Management. She began her professional life as a home care provider, an experience that created the foundation for the innovative quality and success of LifeShare, while also changing her life. At LifeShare, she managed their Operations (Adult Day/Residential; Child Therapeutic Foster Care; HCBS; Child Therapeutic Day/Diversion Services, and Educational Programming), Finance, HR and Quality Assurance (facilitating COA accreditation and policy/procedure implementation). After selling LifeShare to Centene, Rachel remained during the transition of management and helped to provide outcome measurements and COA compliance reporting. At VERTESS she is a Managing Director providing M+A advisor and consultant services, specifically in the I/DD, behavioral health and related healthcare markets, where systems are rapidly evolving, and providers are striving to adapt strategically to diverse challenges.