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Healthcare Business Sales - Why Use an Investment Banking Firm

Apr 8, 2008
Perhaps the most important business transaction you will ever pursue is the sale of your business. Many healthcare business owners attempt to do it themselves and when asked if they got a good deal, many respond with "I think so," or "I got my asking price, "or "I really don't know," or "It was a disaster." Often times these very capable business people approach the sale of their business with less formality than in the sale of a home. The purpose of this article is to answer the questions - Why would I use an Investment Banker even if my company is small and what am I getting for the fees I will pay?

1. Confidentiality. If an owner tries to sell his own business, that process alone reveals to the world that his business is for sale. Employees, customers, suppliers, and bankers all get nervous and competitors get predatory. The Investment Banker protects the identity of the company he represents for sale with a process designed to contact only owner approved buyers with a blind profile - a document describing the company without revealing its identity. In order for the buyer to gain access to any sensitive information he must sign a confidentiality agreement. That generally eliminates the tire kickers and deters behaviors detrimental to the seller's business

2. Business Continuity. Selling a business is a full time job. The healthcare business owner is already performing multiple functions instrumental to the success of his business. By taking on the load of selling his business, many of those essential functions will get less attention, sometimes causing irreparable damage to the business. The owner must maintain focus on running his business at its full potential while it is being sold.

3. Time to Close. Since the Investment Banker's function is to sell the business, he has a much better chance of closing a transaction faster than the owner. The faster the sale, the lower the risk of business erosion, customer defection, employee problems and predatory competition.

4. Large Universe of Buyers. Investment Bankers subscribe to databases of businesses that enable them to screen for buyers that are in a certain SIC Code and have revenues that would support the potential acquisition. In addition they often build specialized data bases that drill down to a particular area of healthcare that would not be evident in a broad SIC code search. For example, it would not do any good to attempt to sell a healthcare information technology company to a company that provides home healthcare equipment. An Investment Banking firm that has previous experience in your industry will be able to quickly target a data base of likely buyers.

5. Marketing. An Investment Banker can help present the business in its best light to maximize selling price. He understands how to recast financials to recognize the EBITDA potential post acquisition. Higher EBITDA = higher selling price. He understands the key value drivers for buyers and can help the owner identify changes that translate into enhanced selling price.

6. Valuation Knowledge. The value of a business is far more difficult to ascertain than the value of a house. Every business is unique and has hundreds of variables that effect value. Investment Bankers have access to business transaction databases, but those should be used as guidelines or reference points. The best way for a business owner to truly feel comfortable that he got the best deal is to have several financially viable parties bidding for his business. An industry database may indicate the value of your business based on certain valuation multiples, but the market provides the real answer. An industry database, for example, can not put a value to a particular buyer on a key customer relationship or a proprietary technology. Most business owners that act as their own business seller representative get only one buyer involved - either another business that approaches him with an unsolicited offer or a referral from his banker, accountant, or outside attorney. Just look at the additional billion plus dollars of value created for MCI shareholders because of the competitive bidding between Verison and Quest Communications.

7. Balance of Experience. Most corporate buyers have acquired multiple businesses while sellers usually have only one sale. In one situation we represented a first-time seller being pursued by a buyer with 26 previous acquisitions. Buyers want the lowest price and the most favorable terms. The inexperienced seller will be negotiating in the dark. To every term and condition in the buyer's favor the buyer will respond with, "that is standard practice" or "that is the market" or "this is how we did it in ten other deals." By engaging an Investment Banker the seller has an advocate with a similar experience base to help preserve the seller's transaction value and structure.

8. Maximize the Value of Seller's Outside Professionals. Investment Bankers can save the seller significantly on professional hourly fees by managing several important functions leading up to contract. His compensation is usually comprised of a reasonable monthly fee plus a success fee that is a percentage of the transaction value. The Investment Banker and seller negotiate with the buyer the business terms of the transaction (sale price, down payment, seller financing, etc.) prior to turning the purchase agreement over to outside counsel for legal review. In the absence of the Investment Banker, that sometimes-exhaustive negotiation process would default to the outside attorney. It is not his area of expertise and could result in significant hourly fees.

9. Maintain Buyer - Seller Relationship. The sale of a business is an emotional process and can become contentious. The Investment Banker acts as a buffer between the buyer and seller. This not only improves the likelihood of the transaction closing, but helps preserve a healthy buyer - seller relationship post closing. Often buyers want sellers to have a portion of their transaction value contingent on the successful performance of the company post closing. Buyer and seller need to be on the same team after closing.

As a general rule, healthcare businesses that engage an Investment Banker as a result of an unsolicited offer from a buyer have achieved an average selling price over 30% higher than the first offer. In no case was the business sold at the initial price. To conclude, the Investment Banker helps reduce the risk of business erosion with improved confidentiality while allowing the owner to focus on running the business. The Investment Banker led sale helps maximize sales proceeds by involving a large universe of buyers in a competitive bidding process. Finally, the Investment Banker can improve the likelihood that the sale closes by buffering buyer - seller negotiations and by balancing the experience scales.
About the Author
Dave Kauppi (davekauppi@midmarkcap.com) is the editor of The Exit Strategist Newsletter, a Merger and Acquisition Advisor and President of MidMarket Capital, representing owners in the sale healthcare and technoloby based businesses. We provide Wall Street style investment banking services to lower mid market companies at a size appropriate fee structure.
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