Sellers continue to benefit from a robust M&A market and strong availability of credit. Even in a seller’s market, increased value can often be achieved through effectively preparing a company for sale, according to experts who spoke on a panel at the 15th Annual Healthcare and Life Sciences Private Equity and Finance Conference on February 21st.
Here are several key points from the discussion:
1. Financial diligence will drive and support valuation. A buyer or investor will very likely perform a quality of earnings review to support the valuation of a business. This will enable the buyer to reduce unknown business risk and better control how known risks enter into the sale process. Having financial records and systems organized and vetted prior to entering the sale process will enable a seller to contribute to a more efficient and focused financial due diligence process, thereby reducing the time to close. Even though buyers will likely perform independent financial review, working with a team of advisors to develop and present a narrative that best positions the seller’s assets (and liabilities) to the market is a sound approach. This narrative (with supporting data) is commonly presented via a short “teaser” document that is distributed widely in the market, a more lengthy “confidential information memorandum” that is distributed to viable bidders and/or in-person management meetings with select bidders.
2. In the healthcare industry, having a buttoned-up compliance program will enable a more efficient sales process. Buyers will look for executive level leadership as it relates to compliance, particularly when the investor is a healthcare focused private equity firm. As part of an increased focus on compliance, the experts noted that sellers should be prepared to discuss regulatory, compliance and related business points in detail, including: (i) the handling of ePatient data/payor data; (ii) coding compared to market; (iii) reliance on reimbursement from high margin ancillary businesses; (iv) regulatory risk and (v) relationships with payors. Again, presenting a narrative around soft points in the business will help increase the value of the business in a sale process. A huge part of this is understanding the business, including regulatory and compliance risks, in detail and having an effective compliance program in place.
3. Cybersecurity is of increased importance to buyers and investors. The experts recommend performing a cybersecurity assessment in advance of a sale process to identify and quantify (and/or address) potential risks related to cybersecurity.
4. Do not underestimate the value of an organized data room and organized legal documentation. The experts recommended ensuring contracts and other legal documentation are up to date, signed and organized so that they can be presented to a buy-side diligence team in an efficient manner. Again, like with other areas of diligence, knowing any corporate, governance or contractual soft-points and being able to explain those to a buyer will ensure a more efficient process and help drive value. Among other things, a buyer will want to review organizational documents, all key contracts and any other legal items that are material to the business. If this information is presented as an organized package at the outset of a sale process, the process will run much more smoothly. More specifically, a seller be able to push for a shorter exclusivity period and sale process if the buyer is not able to use “lack of due diligence” as an excuse for delay.
5. Determine if it’s a good time to go to market. The experts recommend that sellers engage sophisticated advisers to help determine if it’s the best time to go to market and help organize and position around the points referred to above. A good investment banking and legal team can drive value to your business by helping:
- launch a sale process when the company is likely to obtain its highest value sale;
- determine the nature and scope of preliminary compliance reviews, including cybersecurity;
- strategically address and position any known liabilities or other soft-points with bidders; and
- organize documentation and operations to ensure the seller is ready to answer the sophisticated diligence questions a buyer will be investigating.
Organizing with these teams well in advance of a launch will ensure that a seller has its arms around financial, legal, compliance, cybersecurity and other items that a buyer will heavily review during the diligence process.