Volume 9, Issue 3, February 8, 2022

by David Broussard, Robert Villalobos, and Rachel Boynton

Is your healthcare organization thinking about focusing on acquisitive growth? Before you go all-in on the strategy, read on. This column will help you gain a better understanding of the strategy's defining qualities and what is typically required for success.

Active vs. Passive Buyside Engagements

There are two types of buyside engagements: active and passive. Active means a mergers and acquisitions (M&A) firm is proactively searching for potential acquisition targets for a buyer. This engagement typically carries with it a monthly fee. Passive means the M&A firm does not commit ongoing time and resources to seek out acquisition targets. While there is typically no monthly fee associated with passive engagements, this approach brings with it a potentially significant downside. Active engagements usually result in more acquisition targets and, more importantly, better quality opportunities, making it a win-win for the buyer and its M&A firm partner. With passive engagements, opportunities may be few and far between.

Finding the Perfect Fit

When we work with buyers, one of the first exercises we undertake is identifying what type of platform or strategic tuck-in the buyer is looking for and why it will be the right fit for the organization. Here are some key areas we focus on as part of this exercise.

Target acquisition parameters

There are a few target parameters we typically prioritize.

• Size — When we work with organizations growing through acquisition, our first goal is to identify how small or large a target needs to be for there to be an appetite for our client. Annual revenues, EBITDA margins, and market growth potential matter greatly when identifying potential acquisitions.
• Location/geography — Next, we determine what location(s) for the acquisition target will best support the buyer's acquisition goals. Will this acquisition fill a needed footprint logistically? Is it close enough to existing infrastructure that can help expansion efforts? Will the buyer gain access to new contracts, a new market, and/or key management? Is the buyer looking to acquire a local competitor and thus become the dominant provider in that market?
• Growth potential — Finally, we consider the growth potential of an acquisition. Will there be extensive growth opportunities for the market the business is in or has the company reached a plateau for its market share? We recently worked with a physician group that had gained control of 70% of its market share. This hindered the group's ability to find buyers that did not already have a similar platform in their portfolio. One way to look at growth is to consider past performance and measure it with internal models and synergies to see how well the business could perform from day one of an acquisition.

There are other important factors that come into play when developing an acquisitive growth strategy, including the following:

• Funding sources — Business owners are eager to learn how a potential acquisition of their company may be sourced. What will it look like on paper? What is the structure? It is pivotal as a buyer to be transparent concerning how the deal will get funded. Is it 100% cash at close (which sellers love), leveraged debt, or perhaps a mixture? There is no right or wrong funding path to pursue. More importantly, a buyer with a reputation and history of successfully closing transactions will almost always win over a seller, even if the buyer may not have the highest bid. There is tremendous value in such a track record.
• Integration strategy — The single most important factor post transaction for an acquisition — for both the buyer and seller — is integration strategy. While there is no one-size-fits-all approach to integration, a good strategy is to outline past successes with specific examples of what integration will look like and what a seller should expect for themselves and their employees.

Buyer and Seller Expectations

What else do buyers and sellers need to understand when weighing an acquisition? Here are some important considerations.

For buyers

• Know what you're looking for — It's important that you know exactly what type of platform you're looking for. As discussed, qualities to consider include target revenue size and desired location. Growth through acquisition can often be a fruitless endeavor requiring many man hours and resources to simply find companies appropriate as tuck-ins or bolt-ones for parent organizations. The right strategy and partnerships can help maximize efforts and often lead to the successful execution of acquisition goals.
• Be more than opportunistic with your offer — It's a competitive market out there.
• Ask questions up front — It's important to let the seller know that you'll be asking a lot of questions upfront so you can provide the best offer.
• Get the information you need — Make sure you have obtained all the details required so you can feel confident that you are making a fair, aggressive offer.
• Know that you're not alone — If a seller is talking to you, they are most likely having discussions with other buyers.

Buyers need to be aware that many sellers know they're able to significantly increase their sale price by running a full limited auction process, which is one of the main reasons buyers must be aggressive with their offers. The most successful companies looking to grow through acquisition appreciate not being placed in a limited auction process. Thus, they are willing to pay more for a company because it's still likely less than they would pay if they were to go through the limited auction process to acquire that same company.

For sellers

• Find appropriate legal representation — Any M&A advisor would be remiss if they did not encourage the seller to retain appropriate representation from an attorney specializing in healthcare M&A. This is not a job for a family attorney. The transaction process tends to last 6-9 months and negotiations virtually never cease during that time frame. Having the right coach in a seller's corner matters.
• Pay no M&A fee — Sellers should not incur a fee from the buyer's M&A advisor.
• Appreciate value as a bolt-on — It's also important for sellers to know that there is great value in being identified as a target bolt-on. The primary benefit is that those companies will not pay the fee for the buyside agents which ultimately connect the buyer and seller. It is in a target bolt-on's best interest to be open to potential conversations. At a minimum, such sellers can walk away with a better understanding of the market appetite and how strategic buyers are valuing organizations similar to theirs.

Choosing the Right M&A Partner

When it comes time for your organization to pursue an acquisition, you might need help finding the optimal fit. There are M&A firms available and willing to help you. Many specialize in various sectors, such as oil and gas, automotive, hotel restaurant management, and, of course, healthcare. That specialization matters significantly.

M&A firms can spend numerous hours in search of companies that could be a perfect fit for the buyside client and yet nothing culminates and moves into the transaction phase. It's important that you employ a healthcare-focused M&A firm and one that is suited to appropriately support your organization's needs and goals. The right M&A firm will have access to countless company revenue statistics and know what methodologies to leverage to contact business owners and leaders who may be good acquisitions targets for your organization.

Aligning a buyer and seller with the overall structure of a deal, whether it be a minority recap or full-blown exit, is just one of the key components for transactions success. Personality, overall methodology, beliefs around managing people, and a solid plan for continuing forward with a healthy culture will increase the odds of a successful transaction dramatically. The right M&A firm can help ensure an acquisition is successful and both sides of the transaction end up satisfied with the outcome.