A Common Theme for Our Times:  Increasing Importance of M&A Preparation

The M&A markets for exit, merger or recapitalization can be very challenging. The widely known but unspoken reality is that some companies that pursue an exit or merger do not transact. Too often the reason for this is a lack of prior planning and preparation. The most common factors behind “dead” deals is lack of adequate preparation leading to “surprises” in diligence. Buyers and investors are appropriately careful, discerning and expect areas such as clean, honest and accurate financials, along with the management teams, employees, assets, regulatory compliance and operating systems to be proven and demonstrable. Simply stated, in business as in life, it is to your advantage to be well prepared.

The answers to two of the most common, and vitally important, questions in mergers and acquisitions are a roadmap to a successful transaction. 

A merger, recapitalization or other equity-based transaction can be transformative. For the business owners, an M&A event is the largest financial transaction they will ever experience in their lifetime. This is why you need to not only know what questions to ask but also how the answers apply to your specific business. It is also critical to understand the many pathways and hurdles that are possible for your specific circumstances and goals in a transaction.

Question 1: How much is my business worth?

Question 2: What steps must I follow to successfully close on a transaction?

While every business, and each business owner/stakeholder is unique, there many common points and unique differences that must be addressed to fully understand your business and its suitors. Yes, there is a lid for every pot but finding the one that fits can be more challenging than one might imagine.  Sometimes it may seem easy to identify an initial, and maybe even most likely, buyer or investor pool.  The reality is that each member of that club has equally unique mandates, capital resources and potential synergies they may bring to a transaction.  Understanding your business through each of their eyes can be daunting.  Orchestrating it all can be like herding cats… but with experience comes not only the formula but the InSights need to close the deal.   #Part science.

The key is to be well prepared in advance of engaging the market. While running your business may seem simple and routine, the challenge is more than telling your business’ story, performance and its trajectory analysis.  With ever changing market dynamics, and healthcare’s infamous challenges of reimbursement, regulatory demands and human resources, it is essential to understand the strategic options and opportunities from a buyer’s perspective… before entering the market.  From an essential pre-market evaluation to preparing the business for a transaction (that successfully closes) takes a lot of work, coordination and yes, some luck.  #Part Art.  #Part Science.

Question 1:  How much is my business worth?

There are many ways to estimate the value of a business in a current transaction.  One of the most common (there are many) is to analyze and calculate the net earnings of the business and estimated aEBITDA (Adjusted Earnings Before Interest Taxes Depreciation and Amortization).  The adjustments are an understanding of the owner benefits, one-time non-recurring expenses and those items which a buyer or investor would not experience post-closing.  What you will learn is the baseline performance of your business from a historical perspective, through the eyes of the buyer and investor.  To that, expert professional valuators will apply a multiple or factor, that is a multiple of aEBITDA.  Some may express valuation grossly as a percentage (or fraction) of revenue.   While the financial performance is what it is (and it will be verified during due diligence)… the multiple used to value the business may be impacted (positively or negatively) based on the story of your business, its trajectory, capital demands and its balance sheet.

The M&A markets are constantly changing.  The financial markets, interest rates, taxes have their own protagonists.  The strategists and business development forces also drive markets and sometimes, they are the ones to pick the ultimate destination for the company.  In healthcare businesses, some of the metrics can be grossly exaggerated or dynamically under-valued.  The best way to know, definitively, what you business is worth is at a closing.  But, before you rush to market, its best to PREPARE in advance of discussions with a potential suitor.  The first step is to gather your team of professionals including a strategic advisory to help you look candidly at your business… through the eyes of a buyer, banker or investor.  Most successful business sellers, their investors, bankers and corporate buyers agree that an experienced investment banking advisory is worth substantially more than any fees they may charge.  An advisory professional can sometimes make the difference between a deal dying and a successful transaction occurring.

Getting Prepared

To start, an advisor will generally ask for two or three years of financial performance and an overview of the business, its market and ownership.   If the advisory has experience in your market, they should have intimate knowledge of the buyer pool including corporate buyers, strategic private equity sponsors and investors.  This brings additional InSight into how the businesses are being valued and how the deals are being structured.  The pre-market preparation will provide an initial benchmark for you to begin to understand what the carrot looks like at the end of a sale, merger or recapitalization process.

As part of Paragon Ventures’ preparations for our clients, we also include a SWOT analysis, this is a candid and focused look at the internal and external factors which will likely influence the Strategic Options available for your business.  It also provides excellent guidance on the growth prospects for the business… in its business plans, life cycle and beyond through a successful transaction closing.

Question 2:  What steps must I follow to successfully close on a transaction?      

Whether you are a seller or a buyer, in mergers and acquisitions, Be a Good Scout… Be Prepared.  Don’t let the brevity of the bullets below fool you.  There is a lot to prepare in advance of an M&A closing but rest assured, it can all be very well worth the efforts.

Preparation Highlights

For Sellers, you should begin by gathering the following information folders and have a clear understanding of each of these items.

• Financials
  • 3 yrs Profit and Loss Statement (by month)
  • Historical and current Balance Sheet
  • Reporting cash v accrual
  • AR Analysis
  • Debt terms and repayment options
  • Inventory
  • COGs, vendor discounts, rebates, incentives
  • Projections (realistic and achievable)
• Contracts (Assignment and Transferability)
  • Payors
  • Vendors
  • Customers
• Human Resources
• Corporate documents
• Regulatory awareness
• IP / systems
• Market Insights
• Size and scope (capacity)

For Buyers, begin by doing your homework far in advance of entering the market.  If you are new to sector, begin by completing your thorough background research on the sector, the key players and strategic opportunities.  Selecting, assessing, analyzing, financing and closing on an equity (or financing) transaction is grueling.  Gather the following information in clear folders and have a clear understanding of each of these items, before engaging with a business owner.  Be prepared.  Your should expect that they will be.

• Thesis
  • Why the sector has interest and motivation for your firm/goals
• Mandate
  • Specific game plan and direction
  • Build a realistic timeline and share it with the Seller
• Capital – Show me the money!
  • Sources
  • Proposed Structure
  • Terms and conditions
• Regulatory awareness
  • Geographic
  • Licensing
  • Contract assignments
• Intellectual Property
  • Systems for products, processes, operations, billing / collections, etc.

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If you are considering the sale, merger or recapitalization of your healthcare business, Paragon Ventures welcomes you to contact us for a candid, objective and confidential discussion on your business and the Strategic Options available to you and the stakeholders in the current market.

Up next… Execute.  The how, why, when and where of a successful M&A transaction.

For more information on the sales process and strategic options for your business, contact Paragon Ventures