How Buyers Can Gain the Upper Hand in an M&A Transaction
In a healthcare M&A transaction, it may seem like the seller is the party that is in control of the deal. With the seller owning the property in question, naming potential prices, and most likely holding an auction for the healthcare business, the evidence points to the seller wielding the power in the deal. Although the seller does hold power in pricing and the state of the business before the sale, it should be known that the buyer in the transaction does maintain what could be seen as the upper hand in the deal. With private equity firms on the market, and specific provisions that the buyer may request, it is clear that buyers in the industry have tools at their fingertips to take control of an M&A situation. The Ambulatory M&A Advisor explores some of the areas where a buyer could hold the upper hand when it comes to getting what they want out of a deal.
Adam Rogers, partner with the law firm DLA Piper says when concerning power issues in a healthcare M&A transaction, he thinks a lot of it has to do with the dynamics of the situation. In general, it depends if it is a deal process where the seller usually has the upper hand against a field. Once it is sort of narrowed down to one buyer and there is exclusivity the buyer tends to have a little more leverage because of how far along the deal is with their being only one buyer in the mix, he says.
Due diligence power issues are also common, but Rogers says if it is a process to get down to one buyer, usually a decent amount of diligence has been done at that point, and usually by that time it is officially down to one buyer with the LOI in hand.
“Diligence is more or less completed or is close to completion. So, generally speaking, that last amount of diligence will often give the buyer the opportunity to stress that their offer was contingent on “X,Y and Z” and they are not expecting to find new issues discovered in the quality of earnings or legal diligence of risk. If these issues are found, the buyer has the power to turn around and attempt to renegotiate the price of the transaction,” Rogers says.
“In terms of the upper hand, it gives you a lever, but at the same time, it depends where the seller is coming from. Some sellers may just say “no way” and pull out of the deal and try to find someone else to sell the business to.”
Scott Witter, director of business development, M&A at U.S. HealthWorks explains that the modern healthcare market is full of several types of buyers, one of the main buyers being private equity firms that have taken advantage of physician owners wanting to expand or get out of their current position as owners. The “helping hand” of private equity can be used as a form of power in a healthcare transaction.
“I talk to potential sellers all day long and the private equity groups are really there to help that entrepreneurial owner that is looking to grow. They’ve gotten themselves to the point of improving concepts, improving business models,” Witter says.
According to Witter, although a company may have adequate management and have the business in good standing, the area that most businesses struggle during expansion is capital.
“Most don’t have the capital, or don’t want to risk the capital to really support and aggressive growth plan for their business. This is where private equity groups come into play,” Witter says, showing how private equity can display leverage in this type of deal.
“Maybe they are at about 10 or 15 clinics. The private equity is there to support you to get to 30, 50, 60 clinics across a few years,” Witter says.
Although the promise of capital may seem like a shoe in for most physician owners seeking expansion, Witter warns that not all private equity firms will be a perfect fit for a particular entrepreneur.
“They might not be bringing the right expertise to the table; it might be just a bad personality fit, who knows. Not every private equity acquisition is a success,” Witter warns.
Peter Greenbaum, a partner at Wilentz, Goldman & Spitzer and an attorney that focuses in healthcare M&A and transactional law, says that a provision that can be used by a buyer in a transaction to gain the upper hand is an earn out provision.
Earn outs are a mechanism by which the seller is compensated post-closing based upon the financial performance, or some other benchmark, of the acquired business.
Greenbaum goes on to explain that when these types of provisions are created, some of the reasons behind them include several aspects from both the buyer and seller perspectives.
“From the buyer’s perspective, it is often a critical component of a transaction. Instead of paying a fixed price, the parties will tie the overall consideration to the post closing financial performance of the business,” Greenbaum says. “It’s often a better indicator of the value of the business.”
From the seller’s perspective, this provision could put the buyer in control of what they get paid post-closing, and is one of the bigger risks that are taken on with the provision in place. Greenbaum says that the risk is that the buyer could intentionally or unintentionally, change the way that the business is conducted and negatively impact the earn out. These can be changes from terminating critical employees to the buyer simply mismanaging the business.
Rogers sats representations and warranties can also become issues when it comes to power between the two parties.
“These problems usually come down to the indemnity package. There are certainly people that take aggressive stances on reps and warranties on either the buyer or seller sides,” he says.
“Usually, that really just boils down to what the indemnity package looks like. Usually, if the indemnity package is tolerable, then the parties can get there on the reps and warranties. Where the fight is most common is where the specific indemnification lies in terms of adding light on indemnities with no risk.”
If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.