It may seem like a no-brainer that healthcare business owners who are about to embark on a transactional journey would have considered how likely a potential buyer is to actually facilitate the close. Yet surprisingly, this idea of “certainty of close” is often overlooked by would-be sellers in potential healthcare M+A transactions.
When this factor isn’t strongly considered, deals can go sideways or, even worse, completely fall apart. When this occurs, motivated sellers often find themselves in a tough spot. Beat from the exhaustion of working through an arduous due diligence process that has likely incurred significant legal and/or tax consulting costs, sellers may now find themselves feeling what we in the industry refer to as “deal fatigue.” When deal fatigue sets in, it becomes much more difficult to complete a transaction. It can also lead to a decline in business performance if the fatigue extends to the company’s operations and contribute to a lower sale price if performance suffers or buyers sense that fatigue has affected leadership and staff.
Keeping Certainty of Close Top of Mind
What can cause a healthcare business owner to look past or not carefully consider certainly of close? We see it most often for owners hoping to represent themselves in a transaction. They may be an all-too-eager seller, receive an outlier of an offer that is far too attractive to turn down, be desperate to exit the business, or any other numerous reasons sellers may look past or fail to spot some potential red flags.
That’s why certainty to close is one factor we at VERTESS keep front and center for our clients. Any successful healthcare advising firm should do the same, helping assess risks from potential buyers concerning the likelihood of completing the transaction.
Some key questions we work to answer when reviewing potential buyers for clients:
- What is the acquisition history of the buyer? Is its track record indicative of its current goals and objectives for growth, and what is its appetite for continued acquisitions should it buy our client’s organization? As one can imagine, this can greatly impact the equity position post-transaction should the deal structure include a rollover component.
- How transparent is the buyer concerning past transactions and the acquisition value of those tuck-ins? We work with a buyer that operates a $125 million healthcare business and regularly makes small tuck-in acquisitions for geographical expansion. One technique that works well for this company when positioning itself in front of a potential seller is to introduce past business owners it has acquired who now work for the buyer and play an integral part of furthering growth. Potential sellers get a very clear picture of how this company runs a transaction process from letter of intent to due diligence and even what post-employment compensation/bonus plans look like from those who were once in the same shoes and then completed a transaction.
- What is the buyer’s timeline and agenda for closing the transaction? Are they outlined in detail and provided in phases to better manage the process? A 60-day close is quite aggressive and unlikely, but we have seen such a tight timeline proposed and executed. If a buyer has suggested speedy due diligence, it should be well planned and executed to avoid any delays.
Assessing Certainty of Close
Different buyer types transact businesses in various fashions. Some execute more relaxed transactions. For others, the process is more daunting. All types of buyers close transactions, but some are more likely to do so than others.
Let’s look at some of the most common buyer types you are likely to encounter when it becomes time to sell your company and how you can help identify their certainty of close during transaction negotiations.
Private Vs. Public
An important consideration is whether the organization looking to acquire your business is privately or publicly held. Both can make for perfectly well-equipped buyers, but there are several things you will want to consider and understand before making a choice.
Private companies aren’t beholden to shareholders and thus are typically nimbler in their acquisition approach — assuming they have completed acquisitions already in their portfolio. If they do not, this would be a time to be concerned about their certainty of close. The first acquisition for an organization growing is almost always the most difficult because the buyer has yet to fully iron out its process and internal transition strategies. This doesn’t mean their twelfth acquisition can’t be just as difficult, but, by then, they have ideally built a well-oiled M+A team and can move through due diligence and purchase agreement negotiations quickly.
Publicly held companies, for the most part, have excellent M+A teams and regularly acquire businesses. Their certainly of close can usually be judged easily from afar, as can their typical valuation modeling, which is public information.
Strategic Vs. Financial
If you’re dealing with financial buyers in your transaction (e.g., private equity groups, family offices, search funds), it’s important to know whether they are funded with committed capital or will need to go out and raise funds for the acquisition. If the latter, tread lightly. These buyers often offer a higher EBITDA multiple because they know that to be aggressive and have a chance at securing an LOI against already successful acquirers, they’ll need to put forward a strong offer.
You likely want to avoid engaging a buyer who must “shop” the deal around to outside capital providers — no matter how attractive their offer. Due diligence is already a lengthy process. Don’t risk extending it and then having the deal fall apart due to an unfunded buyer not securing the funds needed at the eleventh hour.
Achieving Certainty of Close
When it comes time to exit your business, working with an advisor that can help effectively run the sales process and bring in qualified buyers with sophisticated organizations — and hopefully internal acquisition teams — is the best way to avoid pitfalls and get you to certainty of close. There are far too many ways for a healthcare M+A deal to fall apart, but engaging with a buyer that lacks the expertise or capital to successfully complete a transaction shouldn’t be one of them.
While no healthcare M+A advisor — not even VERTESS! — can ensure certainty of close, what we can do is best ensure success by helping sellers prepare their business for a sale, vet potential buyers, and keep the transaction process moving forward. In most cases, this leads to a successful sale — one that rewards owners for their many years of hard work building a business that others want to own. Please reach out if you’d like to learn more about the VERTESS process and how we are likely helping companies just like yours achieve their certainty of close.
