Your Primer to Healthcare Mergers and Acquisitions

Accelerating Healthcare Growth Through Acquisition or Recapitalization

Sep 14, 2022

by Gene Quigley

Volume 9, Issue 19, September 14, 2022

Many small healthcare business owners struggle when they achieve a certain size or revenue stream. While these owners may see an opportunity to scale, there are challenges: They still have the "mom-and-pop" ideology (i.e., small company mentality) and their organization is not ready or capable of scaling up. This can be a frustrating experience for an owner. They feel their company can do so much more business, yet they lack the capital, know-how, technology, and/or experience to transform their organization from a small business (e.g., $20 million in revenue) business to a much larger business (e.g., $100 million in revenue).

Such a situation is risky for a business owner. If the owner attempts but struggles to grow the revenue and/or EBITDA of the company, this could greatly devalue the business in just a few years. But that doesn't mean owners should abandon their vision for growth. Rather, they may want to explore a sale or recapitalization.

By doing so, owners can accomplish a few things. They can get a nice, first "bite of the apple" for their business. They reduce their financial risk by no longer having so much of their finances in one basket. If they stay involved with the company as either a CEO or board member, they can then work with a financial or strategic buyer with the experience and resources to scale and accelerate growth. This can make achieving growth goals possible and do so in much less time than if the owner attempted to achieve such growth on their own. If growth is successful, the owner and existing (or new) management team would be able to get a second — and likely much bigger — bite of the apple and then cash out with the right rollover or stock incentives.

If proceeding with a sale or recapitalization is sounding like a good plan for your business, follow these steps to help find the right buyer and partner who can help you take your company to a much higher level.

  1. Set your goals. Make them lofty but achievable. To accomplish the latter, put together a supporting team that will provide the backing and expertise you need to develop an optimal plan for moving forward. This team should be comprised of key internal executive leaders, such as the chief operations officer and chief financial officer, and key external professionals, such as an M+A advisor, attorney, and accountant.
  2. Outline your ideal situation as the owner/leader. How much of your company are you willing to sell to acquire the resources needed to achieve your growth plan? In what capacity do you want to remain with the organization following a transaction?
  3. Assess your organization. Start with your immediate leadership team and cascade down. Ask yourself: Do they have the drive, capability, and experience to take on this journey? Can you envision them as part of a company you hope will be a few or even several times larger in just a few years?
  4. "Topgrade" your leadership team. Before you proceed with bringing on a financial partner, you will want to consider topgrading your leadership team. Topgrade means two things. It can be a nice way of saying upgrade your team by replacing existing leaders with better qualified leaders. It can also mean improving your current team though training.

Why is topgrading important when contemplating a sale or recap? This is not the time to hope you have the right people or be looking past shortcomings that make these individuals less effective in their roles. Be prepared to replace leaders or find new roles that will be better fits in support of the overall growth plan or at least consider whether training can strengthen your existing leadership team. If you have a solid team, it's still worth taking the time to identify any knowledge gaps and then invest in training and executive coaching. A financial buyer will see much higher value in an organization that comes to the table with an all-star leadership team already in place and ready to put in the work.

  1. Test the waters. Even when owners are not necessarily looking to sell, they should always be putting feelers out to gauge buyer interest in their company. This way, they won't miss key opportunities to bring in a partner, sell, or recapitalize.

If you're serious about testing the waters, this is a great time to speak to an M+A advisor and receive a valuation on your organization. A good advisor will coach you as to the right time to sell or not sell. An advisor can share competitive insights (e.g., previous competitive sales and multiples) and paint a picture of what buyers are currently looking for — and, just as important, not looking for.

If you decide to sell, an advisor can be invaluable in creating that competitive environment that drives up your sale price. In addition, an advisor will aid in all the transaction negotiations and help ensure the appropriate stock options and rollover equity are included in the deal.

  1. Identify your ideal partner. If you feel it's time to grab that first bite of the apple and your organization is ready to scale with the right plan and the right team, think long and hard about what the ideal buyer looks like. Is it a financial partner? Do you want a strategic buyer who will make your company part of a larger competitor's organization?

In most scenarios when owners want to stay on with their company and cash out even bigger in a few years, the financial buyer tends to be the clearer path forward. This is not to say a strategic partnership cannot work. In some cases, it's the right decision. However, when you are looking to drive your organization beyond your current capabilities, someone who is going to invest quickly into the company and target its key needs for growth plan tends to be the right partner.

This is also an area where an M+A advisor can prove very helpful. Most advisors, especially ones specializing in your line of business, have extensive resources and rolodexes of potential buyers and can quickly help you cast the right net to initiate discussions with high-quality, potential buyers.

  1. Fish or cut bait. After going through the processes discussed thus far, which should help you gain a better understanding of your company, its leadership, and your potential paths forward, it's time to make a decision. As the owner, you will want to do what is right for you and the future of your company. If you decide to proceed with pursuing a transaction, the work you have put in should help better ensure a successful outcome. If you feel it's best to wait a year so you can better get your house in order, you will be in an even stronger position when the time is right.

Understanding Your Options

Selling your baby can be emotional but exciting at the same time. Following the steps above and better understanding your options will put you in a much stronger position regardless of whether you sell or not.

If you have questions about pursuing a sale or recap, please reach out to our team of expert healthcare M+A advisors at VERTESS. We'd love to learn about your business and talk about how we can work together to achieve the best path forward for you and your company.

Gene Quigley

Gene Quigley

Managing Director

For over 20 years Gene has served as a commercial growth executive in several PE-backed and public healthcare companies such as Schering-Plough, Bayer, CCS Medical, Byram Healthcare, Numotion, and, most recently, as the Chief Revenue Officer at Home Care Delivered.  As an operator, he has dedicated his career to driving value creation through exponential revenue and profit growth, while also building cultures that empower people to thrive in competitive environments.  His passion for creating deals has helped many companies’ platform and scale with highly successful Mergers and Acquisitions.

At VERTESS, Gene is a Managing Director with extensive expertise in HME/DME, Diagnostics, and Medical Devices within the US and international marketplace, where he brings hands-on experience and knowledge for the business owners he is privileged to represent.

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