I am often asked “what are the properties of healthcare transactions that are likely to close.” It is a good question because often corporate mergers & acquisitions professionals simply get the marching order “Close the Deal.” Knowing these characteristics and planning accordingly is important. They apply across healthcare sectors, whether it is the sale of skilled nursing facilities, home health agencies, hospitals, behavioral health services or medical specialty services. Below is a short-list:
- Personal Rapport and Lines of Communication between Seller, Buyer and Acquisition Team – The popular quotation from the Godfather movie, “its business, not personal” always applies, however, personal factors can still get in the way, even if the parties try hard to suppress them from interfering with the deal. So generally, it is better when personal rapport and open lines of communication exist among the parties involved in a deal. I would argue that you cannot negotiate until there is at least a foundation of confidence in the participants. I am not saying trust, but a founding belief that the actors are pursuing the transactions in good faith and that a professional approach to the business at hand is observed. Obviously the better the rapport, the easier it is to negotiate because having an atmosphere of good will and intent helps the transaction progress and ultimately close. A dinner or a lunch together goes a long way to forming and reinforcing bonds of rapport.
- Full Disclosure of Business Condition and Prospects – Sometimes I have been called a data freak, but I am passionate that all the information about the business for sale is made available to all potential buyers. In addition, as an intermediary, whatever additional data they need, I try to assemble. I rarely balk at data requests. Sometimes in small businesses that are Sub-chapter S corporations or LLCs for tax purposes, buyers ask for personal returns. I think that providing the Sub S or the tax schedules for the personal returns is acceptable, but not the whole personal tax return. First, it is not relevant and should remain private. Second, how someone prepares their tax returns is a reflection of strategies to minimize reported income, so it may not always be an accurate reflection. But other than that rare exception, if you as a buyer, want to see the detailed General Ledger print-out, I am a fine with that or anything else for that matter. If you are interested in that level of detail, then I figure this is a serious buyer. Full disclosure means full disclosure whether it augurs favorably or unfavorably for the seller. Better to have it disclosed early than at the closing table.
- Realistic Price Expectations –There are aspirational prices and optimal prices. Aspirational prices shoot for the moon and optimal prices reflect the higher end of market conditions. You could ask for aspirational prices as a bargaining gambit, but have to know that the market is rationale and that more likely the seller will get something within or at the top or bottom of the normal range. Every wants to make a great deal, buyer and seller alike, but it is also critical to have a sense of the real value.
- Stable Operating History – A stable operating history gives buyers assurance that business conditions can continue in the same trend.
- No Deal Killers – Sometimes “deal killers” exist, such as a bad license survey, dramatic drop in utilization, an outmoded physical plant, presence of a collective bargaining agreement, etc. These factors can sometime kill a deal because the parties cannot overcome the problem or the buyer’s willingness to take on additional risk factors. Sometimes buyers withhold known deal killers thinking that due diligence they will “re-trade” for a better deal. But, unfortunately, these deal killers have a way of ultimately rearing their ugly head. If a buyer thinks something is a deal-killer, probably their concern will be difficult to resolve, other than a deep discount of the price, which is the seller is unlikely to accept. Better for the parties to part ways. If you are a seller, better to acknowledge the deal killers upfront and walk away. If the buyer hates the physical plant, they will never overcome that mindset.
- Timing – Timing can be everything. Enough said.
- Strong Motivating Drivers of the Parties – Each side has strong incentives to close a deal. So one reliable bellwether measure of a closable deal, is there a fit, do both parties want to make a deal, that is, a willing and motivated seller and a willing and motivated buyer.
- Absence of Difficult or Convoluted Issues – Simple is better. If the structure of the deal becomes complex or convoluted to overcome a problem, or risk, a special situation, or is designed for tax purposes or SEC reporting purposes, the transaction often dies under the weight of its complexity. Once the economics of a transaction takes a back seat to formulating the deal to fit other considerations, the deal is in trouble.
- Capital is Available – You need money to close deals either your own equity or sources or equity and sources of debt. If the credit markets dry up, getting deals done is hard, if not impossible.
- Deal Has Momentum – Keep those doggies rolling. A deal has to keep moving ahead. Progress has to be made daily. If the parties don’t keep their feet on pedal, then deals have a way of getting delayed or dropped because other opportunities or problems arise. You have to strike while the iron is hot and keep the pressure on till closing.