Volume 9, Issue 18, August 30, 2022

In this column, I want to talk about an alarming and growing trend — one that's leading to healthcare business owners getting paid much, much less than they deserve for their company or other potentially disastrous outcomes.

This trend concerns owners selling their companies to cold callers.

We've all received cold calls. Someone calls you out of nowhere, you pick up the phone, and the person on the other line offers to sell you a "great" product or service. In the scenario I'm describing, it's cold calling to the extreme: Someone calls up a healthcare business owner and says, "I want to buy your company."

This happens quite often. An offer to buy your company in this manner may seem appealing. After all, the buyer has taken the initiative to reach out to you because you've developed a good business. They may offer what seems like a fair or even generous price for your company. You may have been considering whether it was time to consider a sale, and this offer may appear to be a quick and easy way to exit your business. The buyer may put a short deadline on their offer, so now there's even more pressure to act.

My advice: Don't. While — disclaimer — VERTESS as a healthcare M+A advisory firm is in the business of helping healthcare business owners sell their companies, whether you work with one of our advisors or someone from another firm, the sale of your business is not something you should do on your own, and you should definitely not sell to a cold caller.

Red Flags Aplenty

Consider that all the tactics I describe above, from the initial surprise outreach, to the offer price, to the deadline, are intended to convince you to sell your business to company or competitor you've likely never met or had very limited interactions with.

Go down this path and you may still end up with a decent payday. But you won't know whether it's the best payday possible (it won't be). This cold caller is approaching the transaction as if they're the only potential buyer for your company. Thus, they are not motivated to make their best offer, present their best terms, use synergistic value and be competitive — since they believe they have no competition. Their offer will likely not be insulting to you since they want you to seriously consider selling your company to them, but they're hoping to find the lowest offer that will get you to pull the trigger. It might be a good offer, it might be fair market value, and it might be what you thought your company should sell for — or even higher — but it won't be a great offer. Note: Three out of four of VERTESS's sellside transactions sell for over fair market value.

If a seller accepts the offer, that's when things can get dicey. Unless the terms of the sale were carefully vetted, a seller could be walking into a trap. Sellers are typically naive as to industry-specific terms and standard market terms. Unless they are performing transactions on a regular basis, there isn't a great reason to understand these concepts — especially when most sellers are busy running their company's day-to-day operations. Buyers are always quick to stress that their terms are market when while they are not. They even try this on seasoned dealmakers like me.

Certain terms can allow a buyer to pull back some of the money offered to the seller and put it in places where the seller cannot and will not ever be able to access it. Then there's the potential for a re-trade. That's when a buyer asks the seller for a price reduction well into the purchase process. This can happen multiple times. There doesn’t need to be a re-trade for a seller to lose millions of dollars in transaction value. There's a strong case to be made that terms are more important than purchase price. One cannot have a good purchase price without having good terms.

At this stage, the best-case scenario for a seller would be for the sale to fall through. Unfortunately, many sellers don't get this scenario and must follow through with a sale they feel obligated to complete and they end up regretting.

The Importance of a Proper Exit

In speaking with some healthcare business owners who sold to cold callers, they point to the fact that doing so allowed them to avoid what they perceived would be a lengthy, cumbersome process. The offer landed in their lap, and they took it.

While healthcare transactions can take some time, I cannot emphasize enough the importance of developing and executing a proper exit strategy with an M+A advisor.

Consider that you've likely spent much of your life building up and creating great value in your company. You've taken the time to try to do everything right for your company up to this point. Don't abandon patience at the end.

When I talk with healthcare business owners, I tell them the three most important objectives of a proper exit are as follows:

1. Finding the right, compatible exit partner — one who will preserve the legacy of the business, support the company's staff and clients, and take the business to the next level.
2. Securing fair and good quality market terms — for both parties.
3. Maximizing the valuation of the exit.

It's unlikely that a cold caller will turn out to be a great partner. It's unlikely that a cold caller will offer favorable or fair terms to a seller. And a cold caller will not offer the best price. In fact, a proper exit process has been shown generate sales prices that can be 50% higher than an initial offer — and with much better terms.

For what is likely to be a healthcare business owner's first — and possibly only — transaction, there are no downsides to going through a proper exit. If the cold caller was meant to be the right buyer, they'll emerge from a field of buyers as the winner. But it's imperative that time be allocated for such a field of buyers to emerge and then make their cases for why they are the buyer for your company.

Trying to Time the Market

I want to conclude this column by speaking to another reason healthcare business owners are sometimes eager for a fast exit and may more seriously consider an offer from a cold caller: timing. Cold callers will often try to speak to concerns that might be on the mind of a healthcare business owner to encourage a sale. These could be everything from economic concerns like inflation, to industry concerns like regulatory changes, to market concerns like increasing competition. Such concerns may propel owners to try to move up the sale of their business in the hopes of timing the market and avoiding the negative ramifications of such concerns.

Understand that the markets are very difficult to time. It's hard to predict markets, and it's hard to time markets. There are always going to be pros and cons to any given market. Timing the market is what directors of mutual funds try to do when they're buying and selling publicly traded stocks and they get the timing wrong quite often.

Rather than worrying about the broader markets — which are out of everyone's control — and trying to time a sale, healthcare business owners need to ask themselves, "What is the right time for me to sell my company? What is the right time on my horizon and my personal plan to move on from my many years of hard work?" The answers to these questions should serve as the basis for when owners begin to more seriously consider an exit strategy and engage an M+A advisor in discussions about how such a proper exit should occur.