Posted by Joel Wittman, MS, MBA
Last month’s blog contained information about valuation and value drivers for health care companies. In this posting, the strategies that can be used to enhance the value of an M&A transaction is discussed.
After a decision has been made to sell the business, owners ask what strategies they can implement to enhance the value of the transaction in addition to those indicated above. Some of those include:
- defining your business, personal, and financial goals – This drives the comprehensive divestiture strategy. The seller has to consider what he or she can realistically expect in the future. What does the seller want to do post transaction? What are the seller’s financial requirements? Am I suffering burnout? A clear understanding of these goals is the foundation for a successful transaction.
-exerting control and influence over the content and flow and information. It is imperative to present the company in its best possible light to qualified buyers and to control the timing of the release of information.
-identifying the correct sources of value – While revenues and profits are the drivers of fair market value, buyers are looking for strategic opportunities. This is the basis of investment value and translates into a higher purchase price. The goal here is to distinguish between fair market value and investment value.
-managing weaknesses in your business – No company does things perfectly. Buyers are aware of this and expect to see some “warts” on the face of the business. A seller should identify the weaknesses, develop a course of correction, and reveal these to the buyer. This strategy reduces the uncertainty a buyer may have that there are other problems in the company and also compartmentalizes the weaknesses from other aspects of the business’s operations. The effect: the perceived risk in acquiring the company is reduced to the buyer which results in increased value and pricing.
-creating a critical mass of buyers – The larger the pool of qualified buyers, the more likely that there will be more than one offer received for the company. This creates a competition between buyers that result in a higher purchase price.
-orchestrating simultaneous presentations – Maintaining control over the timing and distribution of information is critical to managing the mergers and acquisition process. Strategic dissemination of materials can create a competitive bidding situation that will likely result in increased value.
-know the buyer – Play to the strategic interests of the qualified buyers that have been identified as potential acquirers of the company. This tends to improve your negotiating position – you are meeting a need of the buyer – and creates higher investment value for the company (N.B. investment value always exceeds fair market value).
-setting expectations high – The higher you aim, the better the result. Know your sources of power – the strengths, performance, and reputation of the company; the competition in the market place; your ability to exhibit time and patience – and utilize them to achieve higher value.
-paying attention to the deal structure – What exactly is the buyer buying? Is it a stock or asset deal? What are the components of the purchase price? Remember to discount non-cash remuneration and carefully evaluate “earnouts” or payments contingent upon achieving certain parameters.
-working the letter of intent to closing – Prepare well for due diligence – make it easy for the buyer to buy. Be wary of “nibbling” to the “corners” of the purchase price. Carefully scrutinize any post transaction adjustments that can result in a change to the price. Employ counsel wisely including your M&A advisor, attorney, and CPA; when was the last time you sold a business? And, finally, assume the deal won’t close – manage your company like you are not selling because you never know what can happen that can cause a transaction not to close.
You may be wondering how the answer to such a simple question such as “what is my company worth?” is so complex. Selling or acquiring a business is a complex process that combines the aspects of valuation, finance, legal, and emotional matters. If you decide to embark on the M&A process it is wise to engage an experienced professional who can help you achieve your goals and objectives. It would also help if this advisor has the attributes of a good mental health therapist. It can be a grueling ride.
Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University. He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at email@example.com.