Your Primer to Healthcare Mergers and Acquisitions

Peace of Mind and the Emotional Transaction

Apr 16, 2020

by Chris Nielsen

Volume 7 Issue 8, April 14, 2020

Early in my career as an investment advisor, I had clients who would ask me the following: "Is it a good idea to put more money into my brokerage/retirement account instead of committing my extra capital to paying down my home mortgage?" They argued, since they were borrowing on their home at 4 percent and could pay the minimum over the next 20 years, that they could put anything extra in the market and should make 10 percent on average over the next 20 years if the market performed as expected. This, they calculated, would put them 6 percent ahead.

As an investment advisor, that's easy math. Such an approach is sound investing … on the surface. But rather than answer their question, I would ask them questions of my own: "What is going to make you sleep better at night? What is going to give you peace of mind?" After all, this is what most of us are trying to accomplish.

Some people appreciate knowing their home is paid off. It gives them peace of mind to lay down at night knowing they're done with these payments. Others are equally comfortable with keeping their home financed and their nest egg rolling in the market. They're fine with the ups and downs since they know there is likely a greater average return in the end. It is important to weigh the value of dollars and cents versus the value of achieving peace of mind when selling your business.

For sellers, there are many factors to consider when evaluating typically complex offers. Once our team gets a business out to buyers, we take competing bids and provide a side-by-side analysis to sellers to help simplify how offers compare with one another. Our job as mergers and acquisitions (M+A) specialists is to explain these in their entirety. Owner financing, carried interest, and indemnification caps all present (possible) future opportunities and/or problems. When these side-by-side comparisons are completed, there is almost always a clear monetary winner. But is it all about the money?

Understanding Your Priorities

Not surprisingly, the most frequent question we get from sellers in our profession is, "How much do you think I can get for my business?" However, almost as important as this overriding question is, "How is this transaction going to look?" This is the question which sellers sometimes overlook or, at a minimum, don't give enough attention.

Determine your primary goal. For most sellers, peace of mind is the reward they will gain from the business they have spent a lifetime building. Here are some necessary questions to ask yourself as you prepare for a sale, regardless of your motivation:

  • Are you comfortable with have carried interest in a "NewCo" which you have limited or no control over?
  • Do you have faith that the acquiring company will pay the 20 percent you are financing? 
  • Would your peace of mind be better served by taking less at the close, but getting it all on that day or (possibly) more over time?

Furthermore, where is your personal level of comfort? To put it more simply:

  • Do you want to stay with the company? Or do you want to be on a beach?
  • Would you be comfortable on the beach with a position in your former company that you had zero control or input in?
  • Will getting monthly or quarterly payments for the balance of the purchase price make you sleep well at night?
  • Would you feel better if you had it all up front, even though the overall amount may be less?

Stewardship and Legacy

As you consider these questions, think about your personal legacy and company's legacy. How important are these to you? How will this transaction affect your employees, vendors, and clients? Does it matter if your company is absorbed into a larger entity or would you prefer the company look unchanged after the transaction? Everything down to the name of the company going forward can become stumbling blocks as we bring buyers and sellers together. To some sellers, legacy is important. To others, not so much.

Regardless of who purchases your company, there will be new stewardship. Look beyond the offer and assess the buyer. Does its culture fit with yours? Do you feel it will provide adequate stewardship of your company going forward? Is stewardship even important to you?

Make Your Intentions Clear

One of the biggest challenges we face as M+A specialists is getting a very clear picture of what our seller wants to achieve in a transaction. The better we understand this at the onset, the better chance we have of successfully selling the business — with successfully defined as a balanced transaction, where we have addressed the best case financial rewards along with the best case personal rewards to the extent of your and our ability.

This is why, as we have initial discussions with buyers, we ask many questions that have nothing to do with the business and everything to do with the seller. Answers almost always lead back to, "What is going to give me peace of mind?" Whoever you choose to help sell your business, make sure you explain to them the personal rewards you want to receive — i.e., your wish list — along with financial objectives.

Financial vs. Emotional

This brings us to the difference between a financial transaction and an emotional transaction. The financial one is pretty easy to understand: buyer gives you "X" amount of dollars for your business. The emotional transaction is what happens next: letting go of your business.

Since we deal with middle-market healthcare businesses, we are typically dealing with owner/operators who have built their businesses from the start. They have close relationships with employees, clients, and vendors. Around half of their life has been spent in the business from the day the doors opened. As comfortable as our sellers get with the amount of money they are receiving for the business and the structure that best fits their wants and needs going forward, the final hurdle is that emotional transaction.

Be prepared to feel like a parent sending a child off to college. It can be very emotional, and it is usually unavoidable. I mention this because we want our sellers to be as prepared as possible for what will come when we start a process. The better prepared our seller is for every aspect of selling their business, the better chance we have at a successful transaction; monetarily, personally, and emotionally.

Understand that the eventual transition of your business is inevitable. How that transition plays out is largely in your control. We have encountered situations in the past in which sellers cannot overcome the emotional transaction and the sale never occurs. As time passes, the business inevitably falters as the owner loses the ability to continue overseeing the business as is required. That value is forever lost.

Think of your business as a life. It has its own heartbeat; its own trajectory. It will live on once you are no longer there, provided you don't snuff it out before it leaves for college.

Trust Your M+A Partner

Offers from competing buyers can be confusing, and it's easy to get caught up in and overwhelmed by what can be complex structures. Ultimately, our responsibility as M+A specialists is to provide as much peace of mind as we can to our clients at the conclusion of a transaction.

If we do our job well and a seller is transparent on their priorities, we can advise on which opportunity provides the best financial and emotional return.

Chris Nielsen

Chris Nielsen

Managing Director

Chris started his career as a securities broker and Registered Investment Advisor after graduating from college. He purchased the firm two years later and acted in that capacity for many years until a client asked him to divest his family's portfolio of businesses. Chris soon found that this provided the most satisfaction in the use of the skill sets he had acquired over the years in the financial industry. Twenty plus years of advising on the buy- and sell-side of M+A transactions led him to focus on the healthcare industry after completing the sale of a multi-million dollar Durable Medical Equipment (DME) company, and a similar-sized home health care company soon after. His focus has remained in DME and home health since that time, successfully working with buyers and sellers throughout the U.S. As a Managing Director at VERTESS, Chris works with business owners and set reasonable expectations, using clear communications while guiding transactions to completion.

We can help you with more information on this and related topics. Contact us today!

Committed to Constant Improvement?

Subscribe to our bi-weekly newsletter – SalientValue

No Spam Ever. We Promise.
linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram