Your Primer to Healthcare Mergers and Acquisitions

Struggle For A Sale: 7 Reasons Businesses Initially Don't Sell

May 12, 2020

by Bradley M. Smith

Volume 7 Issue 9, May 12, 2020

The VERTESS team of mergers and acquisitions advisors have seen many successes in their careers. We've also witnessed some failures when representing healthcare owners who could not sell their businesses. For some of these owners, their window of opportunity was lost for good. Fortunately, for others, they were able to eventually complete a transaction, but often learned some difficult lessons in the process.

Here are seven of the reasons why these owners initially came up short.

1. The market was changing, and they didn’t adapt

Most buyers expect to expand their acquisition to increase their return on investment, especially in the case of private equity investors. No perceived scalability often means no acquisition.

2. Inadequate financial reporting and lack of consistent attention to appropriate metrics

We have encountered sellers on multiple occasions who neglected to regularly monitor their businesses' financial performance and make adjustments that could substantially improve their results. For example, these owners may have managed a home health “lifestyle business” focused on short-term personal compensation (i.e., excess compensation), not the long-term value of their life-long investment.

3. They watched their business performance spiral downward and then tried to sell as it approached the bottom

The psychology of distress often leads to the delusional thinking that their business will turn around if they “wait it out.” That rarely happens without significant corrective action.

4. The company was in a highly regulated environment subject to change

Contracting regulations can vary dramatically by state or region. If there is change in the wind, then the risk appears very high, even for heretofore successful companies. As an example, this is the case in the Medicaid long-term services and supports market that has been embracing managed care reimbursement models.

5. Management turnover was high, and salaries were below industry standards for an extended period

Investors in healthcare companies are typically wary of a unionized workforce, often attributing their presence to poor management. This is not a judgment about unions; rather, it is a concern about the agility of the organization to achieve future development, especially with the increased emphasis on independent contractor models.

6. Union shops and other restrictive employment agreements were in place

Investors in healthcare companies are typically wary of a unionized workforce, often attributing their presence to poor management. This is not a judgment about unions; rather, it is a concern about the agility of the organization to achieve future development, especially with the increased emphasis on independent contractor models.

The company location was not suitable for growth

Most buyers expect to expand their acquisition to increase their return on investment, especially in the case of private equity investors. No perceived scalability often means no acquisition.

When Life Gives You Lemons...

The great basketball coach John Wooden once wrote that “failure isn’t fatal, but failure to change might be.” Despite encountering the situations described above, we have seen numerous owners honestly assess their circumstances, re-engage with their companies, and, after some time, successfully close a transaction. The necessary “change” that Coach Wooden spoke of was always apparent. The difference between these owners who succeeded and those who came up short was often a case of finding courage and achieving discipline in the face of an original disappointment.

Bradley M. Smith

Bradley M. Smith ATP, CM&AA

Managing Director/Partner

For over 20 years, Brad has held a number of significant executive positions including founding Lone Star Scooters, which offered medical equipment and franchise opportunities across the country, Lone Star Bio Medical, a diversified DME, pharmacy, health IT, and home health care company, and BMS Consulting, where he has provided strategic analysis and M+A intermediary services to executives in the healthcare industry. In addition, he is a regular columnist for HomeCare magazine and HME News, where he focuses on healthcare marketplace trends and innovative business strategies for the principals of healthcare companies. At VERTESS, Brad is a Managing Director and Partner with considerable expertise in HME/DME, home health care, hospice, pharmacy, medical devices, health IT, and related healthcare verticals in the US and internationally.

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

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