Volume 9, Issue 9, May 3, 2022
Thinking about selling your healthcare business? Then you undoubtedly have many questions. And if you've looked to Google to get answers, you've probably found that your searches have yielded divergent, overly complex, or abnormally vague responses. Why can't you find clear answers?
It's because the answer to most of your questions is: It depends. There are many factors that influence the sale of a healthcare business. But that doesn't mean your questions aren't worth asking. There are no bad questions to ask when contemplating one of the biggest — if not the biggest — decisions of your career. To get answers to your questions, don't turn to Google. You'll want to turn to an M&A expert. Getting clear and correct answers to your questions is one of the many reasons why having an M&A advisor will make a big difference as you proceed with a sale. But first you need to find the right advisor.
This article identifies five important and common questions healthcare business owners should ask when considering a potential sale. The piece explains the value of exploring most of these questions with a prospective M&A advisor and how they can help with evaluating an advisor's abilities to serve as your partner and effectively navigate your transaction process.
Owners will want to ask this question of a prospective advisor without expecting an exact monetary figure. Rather, this question helps set good expectations for a range of what your company may transact while also allowing you to know if your expectation for value is aligned with your prospective M&A advisor's view. This question can also serve as a way to gauge your prospective M&A advisor's understanding of your industry and what like-businesses are selling for on the current market.
Why shouldn't you expect a prospective advisor to answer this question with a specific dollar amount? M&A advisors use various methodologies to derive a "multiple of EBITDA" — the most common format of communicating valuation — and compare that to average multiples seen in recent transactions within the same industry. However, it is unlikely that your company possesses each of the average traits in your industry that would derive an average trading multiple. You may be above average in some areas and below in others. That's why this question can help you better understand your prospective M&A advisor's understanding of your industry, how investors view differing segments of the industry, and how your company's internal traits may affect — positively or negatively — its sale price.
When you ask this question, be prepared to ask appropriate follow-up questions. How does your advisor know what your company may sell for? What are the characteristics of your business that render its valuation lower or higher than you expected? How does your business compare to others in your segment with differing characteristics?
Good or bad, your business is probably not average, so assuming it will transact at the average historical multiple of EBITDA is probably an inaccurate expectation, but more importantly your business likely has attributes that will attract certain buyers over others. If hired, your M&A advisor will create a thesis for your company, which is a story about why it exists and operates the way it does. Asking what your company is worth and related follow-up questions can help you gauge the advisor's experience. These questions will also help you understand if your advisor can create a compelling thesis to attract the most appropriate investors and those that will be most interested in your healthcare business.
This question will help you establish a concept of your ideal buyer while also providing insight into a prospective advisor's market knowledge and reach. You'll want to answer some questions yourself before you pose this question to an advisor. Are you looking for the highest bidder? What combination of mission versus financial motivation do you desire? If you plan to work with your company following the sale, what are the qualities that would harvest the most positive, professional relationship going forward? Answering these questions will help you engage in a more meaningful discussion with the prospective advisor.
Depending on how you and your advisor will run the M&A process, you are likely to meet several potential buyers before receiving offers. It may feel like you are being interviewed — and make no mistake, the buyers are interviewing you — but you are also interviewing them.
You probably know the big companies in your industry that are prolific buyers, and you may even know of specific practices, operations, or missions that you feel would be aligned (or tangential) to yours. This is a great starting place to develop the conception of your ideal buyer, which leads to a conversation about compromise: What is required to sell to a buyer that is not ideal? Is it cash, specific employment contracts, or something else?
Advisors should welcome this question because it begets a conversation regarding an advisor's network of buyers, the types (or "classes") of buyers, and how they tend to invest in your industry. Do not expect to know who will buy your business before going into the due diligence process. Instead, seek to understand how the advisor will engage with different buyer types and help you find the right partner for you and your business — one that aligns with your post-transaction expectations.
Understanding who may buy your company should also help you create baseline criteria for evaluating buyers when you eventually begin meeting them. Ideally, you and your M&A advisor should discuss the reasons you may or may not decide to sell to any of them. Those criteria may change during your M&A process, but you start the race stronger when you have a good idea of where it will end.
This question is typically asked by sellers who hope to preserve the legacy of their business, ensure their staff will not be laid off, or make vacation plans for next year. Advisors typically remain vague in a response since the answer is impossible to know at the outset of an M&A process. Rather, this question helps better refine the conception of an ideal buyer while also allowing an owner to further assess whether an advisor is well-positioned to help achieve post-transaction goals.
To help create context for your understanding of what may happen to your company after it sells, first think about whether your company is worth more or less than $100 million. Companies worth under $100 million are considered “lower middle market” in size, which begets a discussion on lower middle market M&A theory: large companies fuel growth through M&A with budgets for acquisitions representing four times the amount spent on research and development or organic growth. Smaller companies (i.e., those worth under $100 million) are often considered building blocks to grow a company that can be sold to the larger conglomerates (there are several buy-strategies, but this one is most common).
What does that mean for your company's legacy and your employees? As always, it depends. Generally lower-middle market transactions do not lead to significant layoffs. In fact, your staff is a significant part of why your company may be acquired. Depending on the healthcare vertical in which your company operates, your brand may also be a significant part of why a buyer may choose to acquire your company. This question is substantially important in the development of your conception of an ideal buyer, which makes the M&A process much clearer and intentional.
If this is an important question to you, it should be an important question to your advisor. Discussing concerns at the outset can yield insights about your advisor, such as their ability and willingness to find your ideal buyer over the highest valuation, if that is important to you. Such a discussion will also establish a waypoint as you delve into the marketplace and begin speaking with potential buyers.
I have not yet heard this question asked from a position of laziness or apathy but rather from expectation setting. Do not feel awkward asking this question. In fact, we suggest asking it to a prospective advisor for two reasons. First, it will help you better understand the depth of the process you want to run that will generate the best return. In some scenarios, it is appropriate to run a large-scale M&A process, while others may be better suited in a limited process. Your prospective advisor should know your industry well enough to help you conclude on the appropriate scale of process. Second, asking this question will help better prepare you for the peaks and valleys of effort in the M&A process. You will be operating your business while selling your company. Your prospective advisor should explain how you can establish a flexible timeline that would permit an optimal balance of work and sale.
The most effective way to lower the time you spend on the sale process is by working with an advisor who specializes in your space. They should already know most of the frameworks in your business and be able to position a thesis. They should be able to speak intelligently with potential buyers before you need to pick up a phone and also know what valuations, terms, and fits are best for you.
You may be in a position to accept the timeline and effort requirements to which the prospective advisor is accustomed. Alternatively, you may find in the discussion around this question that you are interested in a different process than the one the advisor is recommending. Allow yourself latitude in how you perceive this process should proceed. A good advisor has navigated through many of these processes and likely has insights to better ensure your day-to-day priorities are given appropriate attention.
Through your interviews with an advisor and discussion of this and other questions, you may find the advisor is either more or less aggressive than you would prefer. Remember: You are driving these discussions. If you do not feel like you and a prospective advisor are assembling a workflow that aligns with your needs, it may be time to pursue a different advisor.
You may have identified prospective advisors through a colleague, at a conference, or online via search, publications, or webinars. These are fantastic ways to meet M&A advisors but might not lead you to the right person to advise on the sale of your company. We suggest that you do not ask this question to a prospective M&A advisor but rather contemplate the question after you discuss the above-mentioned questions.
This article has established why a healthcare business owner would be best served by working with industry specialists. However, even a specialist may not be the right fit for you. You will spend significant time with this person. Expect evening and weekend phone calls and long conversations where you talk through questions and concerns. After all, you are making one of the biggest decisions of your professional career. So, how do you know if someone is the right advisor beyond their on-paper credentials?
McKinsey & Co. hires almost strictly from Ivy League or similar schools, so they know they're getting talent. But they also have a "no jerks" rule (it's called something else, but I can't write it here). They know they'll be spending considerable time with these hires on planes, hotels, and in engagements. If they can't envision sitting on a flight next to that person dozens of times a year, they won't hire this person — regardless of their talent.
We suggest using a similar rule as McKinsey. You will spend significant time with your advisor, so it's best that you enjoy the time with this person as much as possible. Valuation, terms, and buyer fit are all important, but it is also important that you are positively engaged in the process. Such positivity and strong engagement will also improve how you communicate with potential buyers.
Beyond seeking a friendly, collaborative partner, look at the prospective advisor's track record in a specific vertical. Has your advisor transacted at least one deal in your space in the last 12 months? Recent transaction experience is important because the investment landscape constantly shifts. The drivers of value change, individual investor change, and knowing what the private capital markets are doing today is something only achieved by actively engaging with the market.
VERTESS Managing Directors were all previously operators, founders, and executives of companies in various healthcare verticals, so we differentiate ourselves by possessing deep vertical knowledge of each healthcare segment and track records of success. We'll use our experience and expertise to answer the above questions and any others you have and provide recent examples of how businesses like yours transacted.
Importantly, VERTESS advisors are not the stuffy bankers you may envision. We take great pride in our work and have fun doing it. We hope that you will consider us as you conduct your advisor due diligence. We think you'll like what you learn.
After working in M+A advisory and corporate financial consulting, David co-founded Spero Recovery, a provider of drug and alcohol recovery services with over 100 beds in its continuum of residential, outpatient, and sober living care. As its CFO he led the company to significant revenue and margin growth while ensuring it adhered to the strictest principles of integrity and client care. After selling Spero he remained in leadership with the buyer as its CFO and quickly realized accretion and integration. Of the myriad lessons not learned while earning his MBA with Distinction in Finance from a Tier 1 university, the most profound was the importance of investing in his staff and clients. He learned that the numbers on a spreadsheet represent humans, families, and dreams, which was a radically different paradigm from investment banking.
At VERTESS David is a Managing Director providing M+A and consulting services to the Behavioral Health, Substance Use Disorder treatment, and other verticals, where he brings a foundation of financial expertise with the value-add of humanness and care for the business owners he is honored to represent.