Negotiation Strategies to Meet a Fair Purchase Price
Getting to the point of an agreed purchase price can be one of the biggest hurdles in a healthcare business transaction. One party may want to go high with the price while the other desires a lower number. Arriving at an appropriate purchase price is all part of playing the game of strategic negotiations. The Ambulatory M&A Advisor brings its readers the best and worst approaches when negotiating a purchase price for a healthcare business.
Best Negotiation Approaches
Mark Manigan, partner with Brach Eichler LLC says that when it comes to price in a transaction, the most effective negotiations in his view occur long before definitive agreements are in circulation.
“It’s been my experience that a seller who has got a firm grasp on their financials and their business is able to present the financial picture to a buyer in a much more effective manner. In particular, negotiate modifications to EBITDA which translate to increased purchase price,” Manigan says.
Manigan says he sees the highest and best use of good counsel is helping clients shape up and understand their financials before entering into negotiations. Manigan says this is important so as to put the seller in the best light possible and to be prepared to discuss and explain any negative aspect in their business as reflected in the financials.
Erin Whaley, partner at Troutman Sanders says the recommended approaches depend on which party is being represented. As the seller, Whaley suggest to always want to start high, and as the buyer to always want to start low in order to create room to move and negotiate so that in the end, the buyer feels they have gotten a fair price.
“Part of that is first identifying for yourself as the seller, what your price is. What is the lowest price that you are willing to accept, and for the buyer, what is the highest price you are willing to pay. Knowing that going into the negotiation is very important,” Whaley says.
“As the seller, start a lot higher than where your bottom price is, to give yourself room to move. A lot of times health systems buying physician practices want to conduct an independent third party valuation. Engaging a good valuator and understanding how that company is going to do that valuation is important, as well as agreeing on those valuation rules in advance so you are not surprised. Sometimes you even have each party engage a valuator in order to see how close each valuation comes, then you go from there.”
Jim Hill, Vice Chairman of the firm Benesch says that to him negotiating is a process not a quick decision to a desired price. Hill says he would recommend the sellers get comparables from an investment bank and other industries in healthcare. Aside from that, Hill suggests sellers get a sense of percentage EBITDA revenue and try to match it.
“In the process, time is on the buyers side because you always kind of drag it out and see if they are hitting their forecast,” Hill says.
“We just had a deal that fell apart because we were negotiating for three months and in their last quarter of 2015, they dropped revenue and EBITDA dramatically. If you are a buyer, you stall it out if it’s in a process. If you are a preemptive buyer, a lot of investment banks are willing to give you comparables because they are hoping that maybe the preemptive buy will not succeed.”
Hill says if a seller does not go through a process, a buyer can stretch out negotiations and may reduce the purchase price by your performance, while all the while the seller and their management team are emotionally caught up in the deal.
“The preemptive buyer realizes there is no competition and that you are not taking other bidders. I have often seeing, representing sellers that the buyers stretch it out and reduce the purchase price. This creates a lot of cost in negotiations and sometimes the sellers just give in, but I don’t think that is an appropriate strategy,” Hill says.
Hitting That Price Point
“Typically when talking about a physician practice, it really is very dependent on the type of practice, the size of the practice, how many physicians are in the practice, is it the only one in the area or is it one of many. All of those factors really go into the ultimate purchase price,” Whaley says.
Whaley emphasizes that it is also important for the practice itself to figure out what it wants out of the deal.
“Is purchase price their main consideration? Is that what they really want out of the deal or are there other things that aren’t related to purchase price that they want to get out of the deal? For instance, if they are going to continue to be employed following the sale, then it may be just as important to them to have really good employment terms and get a guaranteed salary for the next five years. They might be willing to give up on the purchase price a little in exchange for that guarantee for five years,” Whaley says.
Manigan says in physician transactions where selling physicians are sticking around post closing on employment basis, which is often the case; the purchase price and the post closing employment arrangement are often closely related in terms of the economic package and are negotiated and traded off.
“There are certain industries where the upfront money for the selling doc is really just advancement of a portion of their income so that they get a pile of money in closing but less compensation going forward,” Manigan says.
Whaley says this example is the opposite of a retiring physician where all they really care about is the purchase price and they want to maximize the purchase price because there really is nothing else they need to worry about going forward.
Hill says in order to even come near reaching a desired purchase price; they need a growth pattern because that will qualify them for a premium on the purchase price.
“A lot of times you see the processes where the seller has not done quality of earnings which is pretty standard these days,” Hill says adding that problems can arise when the buyer does quality of earnings and they reveal holes in the financial statements.
“It can be inventory, declining growth margin etc. That is how those deals fall apart.”
Manigan believes that the biggest mistake sellers can make when they take their business to market is to have an unrealistic expectation of value.
“Not only does it demonstrate a lack of financial acumen with respect to the given industry but it also sends out a warning signal to buyers that they may be unreasonable,” he says.
“Of course I never counsel a client to offer lower than market price but you want to rely on folks and advisers who understand the market and can help you position yourself to not only get the highest price but to get to a closing.”
Whaley says that deals with physicians run the risk of things going south in a hurry. She points out that there are a couple of poor negotiation tactics she sees in the industry.
“One is where the physician has set some false expectations in the buyer’s eyes at the beginning and then diligence and valuations don’t support the picture that the physician painted. If the physician paints this very rosy picture of a growing practice that is making five million dollars a year, but then the buyer gets in there with the due diligence and finds out that patient volumes have really been declining for the last five years and they are doing two million a year, that really sours negotiations in a hurry,” Whaley says.
“Then you start looking at other components outside of purchase price. You start looking at ongoing employment agreement terms, non-competes that the purchaser wants to impose on a buyer that the buyer had not anticipated going into it.”
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.