Volume 8 Issue 11, July 13, 2021

Does this sound familiar: The phone rings. You answer, and on the other end is someone who tells you that they represent a company eager to purchase your healthcare business.

These kinds of calls are happening every day, with some businesses receiving multiple calls a week. On the surface, these might seem like good calls to receive. After all, if someone is interested in buying your business, you must be running a good operation. And if you've been considering whether it's the right time to sell your business, such a call might be an avenue forward for you.

But seller beware: While it's good to answer the phone and hear what's presented to you, moving ahead on a transaction with a cold caller could be fraught with risk. Let me explain why.

A Concerning Trend

There are an increasing number of merger and acquisition (M&A) firms doing what can be described as "dialing for dollars." In these scenarios, a representative from the firm calls around to healthcare businesses and states that they are reaching out on behalf of an interested party. The representative says that before the buyer can make an offer, the firm needs to gather some information about the company.

While such outreach efforts can be legitimate, oftentimes they are not. In the dialing-for-dollars scenario, the M&A firm does not represent a buyer. Rather, it hopes to take the information provided by the target company and then do one of two things. The first is find a buyer, likely through more cold calling. The second is to come back to the target company and claim that the non-existent buyer isn't interested in proceeding with the acquisition but that the M&A firm would be happy to take the company to market.

Typically, these firms do not know healthcare and the healthcare industry. They may also have little experience with completing transactions. But they are hoping to get companies under contract — often by overpromising returns on a sale — and then eventually find a prospective buyer.

What's the problem with this for a seller? It's good when a buyer comes to the table, but there are potentially multiple issues with how the scenario played out. Since the buyer may be the only company making an offer, there isn't any incentive for making a great offer. A "good enough" price may be enough to entice a sale, especially if the seller doesn't have a strong understanding of the market and valuations — two factors that can increase a sale price.

Another problem concerns terms of a sale. Buyers know they can typically purchase companies for a good price if they can engage with a seller one on one. If a seller pushes for more money, buyers may be willing to increase their offer. Why? Price is just one aspect of a sale. Most sellers have a sense of how much money they would like to get for their business. Unfortunately, sellers often do not know what terms are considered appropriate for the "market." Just as important as the dollar amount, terms and conditions include reps and warranties, working capital, escrow, earnout, transition service agreements, seller notes, and clawback provisions. Buyers can alter the terms and end up taking back a significant piece of the deal even if the sales price comes in higher than the original offer.

Value of the Process

To better ensure you receive a fair price and terms for your business - accurately reflecting the quality of your company and the current market - a proper process is required. And it's not a process that should play out like what's described above.

The process should begin with your company finding an M&A advisor — one that's experienced in healthcare and your specific industry — that can help prepare your business for a sale. This will include everything from creating a detailed book about your business (i.e., confidential information memorandum (CIM)) to putting together a cleaned-up financial analysis to building a data room with key documents about your business and its operations.

Then the advisor goes out and finds multiple prospective buyers, validating that these buyers are viable companies in a position to make reasonable offers and be good stewards of the business they may acquire. With multiple potential buyers, competition typically leads to a more favorable price and terms for the seller. While this process takes some time and will require a seller to invest in the services of the M&A advisor, the outcome is almost assured to be favorable compared to a seller trying to complete a transaction on their own.

Consider the following example playing out across the country: Private equity groups (PEGs) are forming new platforms and then executing the dialing-for-dollars scenario to buy companies on the cheap. When VERTESS is engaged by a seller, we sell nearly identical companies to the same PEGs for 2-3 times the sale price while also securing good terms for the seller. 

Don't Go It Alone

The key takeaway: Working with an advisor, whether it's VERTESS or another qualified, healthcare M&A advisory firm, is best practice. If you're not doing everything you can to prepare for a sale, you're doing yourself a disservice and almost certainly leaving value on the table.

So, the next time you get a call from someone telling you they have a buyer lined up for your business or want to make you an offer, think twice before proceeding. Just as you probably wouldn't agree to buy homeowners insurance from someone randomly calling you, it's probably wise not to proceed with selling your company to a cold caller. In both scenarios, the person on the other end of the line likely doesn't have your best interests in mind.