It is a rare healthcare company that has no regulatory risk exposure in at least a few material areas. As sellers of healthcare companies prepare them for sale, they will need to navigate first the letter of intent (LOI) stage with potential buyers and ultimately the more detailed definitive agreements.
The key differences between negotiating deal points at the LOI stage versus the same negotiation at the definitive agreement stage are leverage and information. At the LOI stage, the buyer is often still trying to get the deal (especially in an auction environment) and is operating with limited visibility into the potential magnitude of issues. The seller often knows more about potential issues but believes the realistic exposure (vs. worst-case scenario exposure) is relatively small. Once the LOI is signed, the leverage in the hands of the buyer often increases as the closing of the transaction becomes more certain usually a key desire of the seller and arguments that the buyer should absorb more risk usually devolve into re-pricing negotiations which the seller wants to avoid.
What should a seller do or not do at the LOI stage?
- Do not try to minimize sell-side due diligence. While commissioning some level of sell-side legal due diligence will increase the initial expense of a transaction, it can avoid costlier pitfalls later in terms of late pricing renegotiations, risk to ultimate closing and delay. It is difficult for the seller’s legal team to shield or shade these issues in the dark. David Stienes, a Principal at LLR Partners, noted that “Dealing with prospective sellers who have performed preliminary work around the key regulatory issues and are willing to have open discussions in advance of an LOI is very comforting to us as buyers and allows greater certainty around our offers. From the sellers’ perspective, it can also be a valuable tool in assessing the knowledge and ultimate viability of us as prospective buyers. If interested parties are unwilling and/or unable to discuss these issues upfront, it could be a sign that they do not have a full grasp of the matters and will be educating themselves throughout the process. This will greatly impact both certainty and speed to close.”
- Do not hide the ball. While slowly parsing information at the early stage is the best pathway to getting an LOI signed, it is the worst way to limit the cost of such issues in terms of pricing, escrows and indemnity exposure.
- Negotiate indemnity cap/survival terms for known issues. This is often difficult prior to substantial due diligence; however, sellers can often pressure buyers to accept narrower limits at the LOI stage than later in the transaction process.
- Force heavier pre-LOI diligence on known issues. It is unlikely that a buyer will do full legal diligence on issues at the LOI stage, but a request that buyers more fully review known issues can lead to more advantageous LOI treatment or at least swing some of the post-LOI leverage to the seller.
None of these strategies can fully insulate a seller from the impact of known regulatory issues on the sale process; but they can minimize the pain, expense and delay that these issues often cause.