Selective Sellers in a Healthcare Transaction
During a healthcare M&A transaction, selection of just the right buyer can be the difference between success and failure in a deal for many sellers. From understanding who the current buyers are on the market, to what they are looking for in ASCs and other outpatient care busiensses, The Ambulatory M&A Advisor provides the information that a new seller needs if they are scouting for potential buyers.
Edward T. Laborde Jr; partner with Dentons (US) LLP says when discussing attracting buyers to a surgery center, some of the ways that sellers can get their facility ready for a possible sale is a demonstrated record of compliance with the various laws and regulations that apply. Another factor is profitability; obviously, the more profitable the facility is, the higher the valuation is going to be when it comes time for the sale. Thirdly, in addition to the profitability is the financial statements of the business.
“You have got to have clean, easy to read, easy to understand balance sheet and income statements for your facility. A lot of companies neglect some of the basics; they may be collecting money doing cases, but they really don’t know how they got there. So, when 3rd parties come in and do their due diligence, they are looking for objective data that supports their general sense of what the facility is doing,” Laborde says.
Mark Ostryn, CEO, Strategic Transactions explains that the ultimate way for an owner to position their healthcare company for sale is to consider the main acquisition motives of a potential healthcare strategic buyer. This could include one or more of the following: to consolidate practices to achieve economies of scale, to facilitate geographic expansion, to improve market share in a specific region or speciality, to expand or diversify their service offerings, or to acquire key people, expertise or intellectual capital.
“In the last ten years, much of the acquirer has involved “roll ups” i.e. consolidation of providers to ensure the spreading and consequent thinning of technology and administrative costs. To best position themselves for a strategic sale resulting from a “roll up” the seller should focus on improving revenues rather than earnings,” Ostryn says.
To achieve this, Ostryn suggests that business owners offer a diversity of newer specialisations that are likely to be in demand.
“My seller client, a chain of upmarket anti-ageing clinics attracted significant attention from plastic surgeons. The surgeons’ problem was that the operation was a “one off” procedure while the clinics required several return visits to ensure that the patient kept looking their best. The anti-ageing clinics cleverly marketed loyalty programmes for their customers to encourage these repeat visits,” Ostryn says, adding that they should group together a series of practitioner specialists in a single specialisation which is often described as a horizontal merger.
Identifying Top Buyers, Current Buyers
Ostryn says some of the best ways of identifying active buyers involve tracking published online sources. Ostryn says website pages of large scale providers are a great place to start.
“Prospective acquirers who may be seeking a footprint in the sellers’ locale may be those that don’t currently have one there. Just look up the location of branches on the prospective acquirers’ website. Also, many of the larger scale providers are publicly listed companies. A scan through their publicly available annual reports and investor presentations may hint about their future intentions.
Some of the best buyer leads come from the buyers themselves contacting the seller cold. One word of warning though –the seller should not engage exclusively with that proactive buyer. Once the seller has made the decision to consider selling, they should also engage with other parties. Competitive tension is what keeps deal terms attractive to sellers,” he says.
Ostryn, who operates his business in the Asia Pacific region adds that there is a challenge in defining “best buyers.”
“Best in terms of sale price, best in terms of whether the practitioner owners need to serve a three year earnout, or best in terms of keeping staff happy and ensuring a thriving practice? In the Asia Pacific region, many “roll ups” have been less than successful as the human factors weren’t sufficiently considered by the number crunchers.”
Patrick J. Hurd, partner with LeClair Ryan says that currently on the market, the synergistic buyer reigns. According to Hurd the synergistic buyer is an entity already established in or complementary to the healthcare industry sector of the target seller.
“A primary purpose of such a synergistic acquisition is to gain economies of scale or to increase growth at a rate or in a direction otherwise unavailable by internal existing company growth. The primary strategic focus of such a buyer is how the seller’s entity will enhance existing operations, either short-term or long term. Such a buyer may pay a premium for the seller’s operation with a view to creating growth from yet unrealized (speculative) synergies,” Hurd says.
“Another type of strategic buyer, is the financial buyer. While such a buyer may currently occupy a niche in the healthcare sector of the target seller, it may also be a venture capital firm or investment management entity looking for a good return. Such acquisitions are typically highly leveraged and focus on the target’s cash flow and a specific ROI. For example, there were several Health IT acquisitions in 2016 by investment capital firms or IT companies with small but promising platforms needing the technology or creative talent of the target seller but lacking the internal capital to acquire such entities.”
Hurd believes both types of buyers may be focused on strategic acquisitions but the synergistic-strategic buyer intends to remain in the healthcare industry sector long term while the financial buyer focuses on short-term gain (albeit from some immediate synergies in some cases) with a view to spinning of the company or selling it to a synergistic buyer down the road. I prefer to use “strategic buyer” and “financial buyer” rather than “synergistic” versus “strategic.”
Laborde says the industry is seeing acquisition activity by hospitals and health systems bringing freestanding centers into the health systems by establishing them as hospital outpatient departments.
“You have got hospitals expanding their locations through acquisitions of these centers, which oftentimes, corresponds with getting the physicians into the hospital network. So, wherever you have freestanding centers nearby hospitals, those hospital systems are going to be potential buyers,” Laborde says.
“There are some national companies as well that have been historically active in acquiring centers. Just to name a few, United Surgical Partners, Physician Partners of America, Surgery Partners, and AmSurg; those are some national ASC companies that acquire freestanding surgery centers and create new partnerships with physicians.”
When discussing the current buyers in the healthcare market, Ostryn says that typically, transactions occur most frequently in either the highest growth niches in an industry, or where the industry is achieving minimal growth and its participants can only achieve a return on investment by consolidating through acquisition.
In patient care, the highest growth niche is in ambulance services with an estimated CAGR revenue growth to 2022 of 3.47%, followed closely by general hospitals (3.26%), diagnostic imaging (3.18%) and dental services 2.96%. All data is via IBISWorld. Key determinants of this growth include: federal healthcare funding, private health insurance membership, household disposable income and the median age of the population.
Taking an Offensive Approach
Taking the offensive approach and examining the market can be a great move towards finding the right buyer for your healthcare business.
“If you are a center that is focused on your own market, one way to examine it is to contact a professional investment banker. There are investment bankers that specialize in healthcare M&A. They would be happy to talk to freestanding centers about what is going on,” Laborde says.
“Certainly, you can seek out information from your legal counsel, or your accounting firm; oftentimes, those existing professionals will have insight and can connect a facility with potential buyers or other professionals that are active in that particular market.”
Laborde believes that market analysis is the easy part of the process. According to Laborde, the harder part is making sure that the company is ready for the due diligence scrutiny that will be undertaken by potential buyers. Buyers will use flaws in record keeping, financial reporting, or potential compliance issues to knock down the valuation of a center. Well before a seller is ready to market a center, it is beneficial to make sure that the company is ready to undergo that due diligence investigation.
Ostryn adds that the important thing is for the sellers to be able to put themselves in the buyer’s shoes and look at the financial and strategic impact of them acquiring the seller.
In the medical industry, offensive approaches are best handled through an intermediary figure who is dedicated to finding a buyer. The sellers focus should solely be on growing revenues and profitability of the practice and should not be dedicating time to continually chasing other practice owners.
If you would like to learn more about the concepts covered in this article, want to sell your business or discuss how Ambulatory Alliances, LLC might be able to help you out, contact Blayne Rush, (469)-385-7792, or Blayne@ambulatoryalliances.com.
If you have suggestions for future topics, email Blayne@ambulatoryalliances.com.