Volume 9, Issue 14, July 5, 2022
In this SalientValue column, I'm going to touch on a number of points I hope healthcare business owners will find helpful as they consider the current position of their companies and plan for their futures. There are warning signs ahead, and having been through the ups and downs of various business cycles, I'd like to highlight some concerns and share some recommendations.
I'll begin by taking a step back and looking at the lay of the land regarding today's market. Sitting at the mid-year point in 2022, we find ourselves in uncertain times. The political and financial landscape is concerning. The stock market has declined and become more volatile. Real estate values have dropped. Interest rates are up and projected to go higher. The market for early-stage investments has come under intense pressure. Inflation is running at levels not seen since the 1970s. Pricing on all assets — including privately held, middle market companies — are under scrutiny.
Having worked in healthcare mergers and acquisitions (M+A) for decades and lived through business cycles several times over, this kind of uncertainty is not new or unprecedented.
In 2009, the Dow Jones Industrial Average was under $7,000. In early 2022, it almost hit $38,000. The bull market was driven, in part, by government stimulus, money printing, and low interest rates. Capital has flowed into private equity and fueled unprecedented buying levels of privately held companies. The values of private companies have gone up right along with public companies. The number of deals and capital invested has broken records year after year for some time. This period has been an anomaly and not the norm.
As I write this column, we're looking at a Federal Reserve that understands inflation is not "transitory." It's thinking that it should have raised interest rates sooner. At its most recent meeting, the Fed hiked rates by 75 basis points. Price increases in general and on food and gasoline in particular are affecting everyone. As more interest rate hikes are expected, talk centers around if we've entered a recession or if it's likely to happen soon. Some prominent Wall Street bankers are beginning to predict fewer deals and with lower valuations.
Said differently, the bull market for both public and private markets cannot last forever. There is reason for concern.
In several healthcare lines, smaller companies have enjoyed certain advantages over their larger competitors. Business owners were close to the action and able to move quickly in response to changing market conditions. Referral sources gave some preference to smaller providers in the placement of clients.
Over the past five-plus years, we've seen a change. The advantages of larger organizations have become more of an influence. More regulations, the need to invest in technology (along with the benefits produced), aggressive hiring practices, insurance costs, and overall scale are making it more difficult for smaller companies to compete. Innovating in today's operating environment as a way to stay ahead of larger competitors is not easy, inexpensive, or without risk.
We go through periods where it's good — or even great — to bring businesses to market. During other periods, buyers go away (as I will discuss below), and business ownership becomes riskier. I've never viewed an M+A advisor's role as telling clients and potential clients that it's always a good time to sell your business. It's an advisor's role to be honest and forthcoming. As we work to navigate this turbulent period, such transparency is more important as ever.
When the "financial crisis" hit in 2007, I was in the process of buying companies for a private equity-backed sponsor. We went from buying companies as fast we could to a full stop essentially overnight. At that time, we had eight letters of intent executed and outstanding. We were working through various stages of diligence when we hit the stop button. I was responsible for calling those eight business owners and telling them we would not proceed with the transaction. "Full stop" meant just that: We were not buying anyone at any price. Owners that had negotiated in good faith were now told that there wasn't a deal, and, in truth, there were likely no other buyers. Those business owners offered deep discounts in the prices of their businesses, and we still needed to decline. Conditions can change fast. Those business owners had to wait years before their eventual exits.
Many advisors in today's market have not lived through the ups and downs of the business cycle. Fewer people seem concerned or even aware of business cycles and where we may presently reside. The simple truth is there are risks of business ownership. That's why it's important to regularly assess the current state of your business and answer questions about how well it's positioned for the future. Is your business inflation proof? Is your business recession proof? Is the value of your business going up or down? Are there steps you can take to give your business its best chance of getting through a prolonged downturn?
As I stated, I've never thought an advisor's role is to tell owners all the things they want to hear. I do not default to saying things like, "You've got a great business. We have hundreds of buyers interested in talking with you. I can get you top dollar today for your business." If it's true, I'll say it. For many years, this has been true for many businesses, but business owners and their advisors must be mindful and watch for changes in business conditions. And advisors must tell their clients the truth, no matter how difficult it may be to convey a discouraging message and how little owners may want to hear it.
I'd urge business owners to always be thinking about their long-term goals and, more specifically, the achievement of their most important personal goals. Thinking you can sell your business whenever you want and still get the best valuation and terms may not be the case. For many of my clients, the value of their business makes us a large portion of their overall net worth. How can we help you protect it and fully realize it's value to help you reach your goals?
To further elaborate on that last point, I frequently speak with business owners who share their story about how they got started. Most of my work involves behavioral health companies. Owners of companies in this space typically started the businesses with a specific purpose in mind. Often it involved caring for a small number of individuals. They didn't start the business with the idea that it would grow to a certain level of revenue or profits. But things happened, and suddenly that seemingly small business became a much bigger business and a primary source of income. The business grew to something larger than they ever could have imagined.
Now, many of these owners are baby boomers and planning their retirements. This means addressing issues concerning the business, the futures of their employees and clients, their finances in retirement, and a potential transference of wealth to the next generation. I'd encourage business owners in this position to consider a few things.
First, the sale of your business is a process that is going to take some time. While we at VERTESS manage transactions that move quickly to close, this is not the expectation. In fact, it's not unheard of for a business to go through the sale process more than once to get to a close. Build some cushion into the timing of your exit planning.
Second, I'd urge business owners to consult with their wealth manager, accountant, attorney, and other trusted advisors. Consider your goals in terms of all the things that are important to the sale. Your M+A advisor should be part of that team.
Third, and this is going to sound self-serving: Hire an M+A advisor that specializes in your field. The facts bear out that working directly with just one or two buyers is not going to produce the best result. Research has shown that in about 80% of successful transactions, an advisor ends up finding the buyer, and it wasn't someone the seller ever heard of. Furthermore, research shows a seller is likely to get a price of more than 22% higher in valuation by using an advisor.
Those figures support just two of the reasons sellers are typically best served by partnering with an M+A advisor with experience in their field. An advisor should help a seller secure better terms and avoid costly, potentially deal-breaking mistakes. Find an advisor you trust, who knows your market, and who has completed many other transactions. I truly hate to see potential clients going off in a direction that I know will not serve them well. Using an advisor — whether it's someone at VERTESS or another highly respected individual — is going to be even more beneficial to owners in the coming years.
Before I conclude this column, I want to speak to something I hear often from business owners that can lead to unrealistic expectations. When I tell a client that it's likely to take some time to find the right buyer, a common response is, "But I'm getting phone calls all the time from people telling me they want to buy my company. Doesn't that mean selling it — and for a high price — should be easy?"
Receiving phone calls from parties saying they're interested in acquiring your business is not new or evidence you're going to get a good deal. Today's business owners are inundated with phone calls from supposedly "interested" buyers. The reason? Buyers and other advisors hire outside marketing people to do nothing but make phone calls to companies. They are paid incentives to set up a phone call between the buyer and prospective seller. In a similar way, tens of thousands of emails go out daily bombarding business owners with the message, "We are very interested in acquiring your business and are paying top dollar for your [specific type of company]." It's almost always untrue, and, again, not evidence you're going to find the right buyer and get a good deal. Buyers use this approach to help find those businesses willing to sell to them for the best price, with "best" meaning the price they are interested in paying.
One of the reasons I chose to work at VERTESS is because, for many years, I was the person acquiring businesses. I worked with many advisors and found the VERTESS team was the best to deal with. They were the most professional and always had their clients' best interests in mind. I believe that having the experience on the buy side helps me in my role advising clients on the sale of their business.
At VERTESS, we look for ways to help clients and potential clients — even those that do not end up working with us. One of those ways is by writing these Salient Value columns. I encourage you to go to the publication's website to see all the articles we've written for your benefit. Please let us know if there are topics you'd like us speak to and provide insights on in a future column. We look forward to hearing from you.
Dave Turgeon has been completing healthcare transactions for over 30 years. He has managed over 400 transactions. He's a Managing Director at VERTESS and works with business owners to maximize the value of the sale of their businesses. He can be reached at DTurgeon@Vertess.com. You can also find him on LinkedIn.
Dave's professional work history includes:
He first became involved in the Behavioral Health space because of the disability of a family member. The mission of these companies is both noble and personal to Dave. He helps business owners with the sale of their business, which means getting them the best value and terms. For him, it means thanking them for making the lives of others better.