Volume 7, Issue 17, September 1, 2020
by Alan Hymowitz, CM&AA, and Jabali Wells, MD, MBA, MSc
Pre-COVID-19, a merger and acquisition (M&A) deal that followed an 80/10/10 structure was fairly common. In such in a transaction, up to 80% of a company's purchase price would be afforded to the seller as an upfront, cash proceed, at least 10% of the company's purchase price would be in the form of rollover equity, and at least 10% of the company's purchase price would be in the form of deferred proceeds (e.g., an earn-out or seller note).
During COVID-19, capital providers (i.e., equity sponsors and lenders) are less keen to such a structure since COVID-19 has increased capital underwriting risks. As a result, capital providers are implementing more conservative approaches to structuring transactions. These often include less upfront cash to sellers at closing, increased rollover equity, and greater deferred payments.
As capital providers are more closely scrutinizing a company's 2020 financial performance via the findings of the quality of earnings and other financial due diligence activities, several common themes have arisen in the COVID-19 environment. They include the following:
To consummate a deal in the COVID-19 era, buyers and sellers should weigh pursuing creative solutions to reflect the investment risks that persist in the current environment. Here are a few options to consider that may help mitigate investment risk incurred by capital providers and push a deal over the finish line:
If you are working through a deal during this health crisis, here are a few more points to keep in mind:Some buyers are issuing letters of intent that include valuations of companies that are more reflective with the higher, pre-COVID-19 purchase prices. Understand that when lenders consider the structure of their debt financing, they may be inclined to propose a different structure that reflects a lower quantum of debt or a lower debt-to-equity ratio than those seen before COVID-19. Cash at closing is only one piece of the total proceeds that sellers can receive from the sale of their company. Ideally, a deal should be structured that affords sellers a second bite of the apple in which the value of their rollover equity will be greater than the value of their cash proceeds that they receive at closing. Buyers and sellers should remain open-minded and maintain a willingness to be as inventive as necessary for structuring and completing a transaction.
Key takeaway: COVID-19 has forced healthcare businesses to navigate uncharted waters. Completing a transaction during these uncertain times will likely require buyers and sellers to take unconventional approaches.
Jabali Wells, MD, MBA, MSc, is a private equity investor with 20 years of experience as a clinician, healthcare executive, and investor in the healthcare sector.
During the past decade, Alan has 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, he was a “hands-on” owner and manager in the pharmacy and home infusion healthcare marketplace for over 15 years and successfully sold his pharmacy to a national company after growing and diversifying their income streams in a very competitive market. Alan's specialties in the pharmacy and home infusion marketplace include long term care, retail pharmacy, specialty pharmacy, and home healthcare, and he has attained the URAC Accreditation and Specialty Pharmacy Consultant designations, in addition to other recognitions. His educational background includes a Bachelor of Arts from Rutgers University and a Master of Arts from the John Jay College of Criminal Justice.