Why Some Deals Don't Close

The healthcare services mergers and acquisitions marketplace is very robust.  There are consolidating buyers in every segment using acquisitions to build critical mass within this highly fragmented industry.  Even though the environment is conducive to successfully closing transactions, some deals don’t close.

Although it may be an unpleasant topic, we think it’s important to address some of the reasons why certain deals don’t close.  Typically there is something about the company or current market conditions that prevents that particular transaction from being viable at that particular moment.

Individual company characteristics that can impact the selling price are known as value drivers.  Certain value drivers are commonly associated with a given company not yielding the premium demanded by the seller.

• Trends and Margins:  revenue, gross profit, EBITDA.  Buyers make acquisitions to help them grow.  If an acquisition candidate has a slow growth rate or weak gross or net margins, the buyer will not pay a premium.  If a seller lacks critical mass in terms of revenues or management depth, buyers will discount accordingly.

• Liabilities:  IRS, CMS, others.  Sellers should expect to satisfy all outstanding liabilities from the proceeds of the sale.  Any misrepresentations by the seller can cause buyers to lose interest.  If the proceeds from the sale cannot satisfy all outstanding liabilities, sellers may not want to close a transaction.  If the seller cannot transfer clear title and all necessary licensure, buyers may not want to close a transaction. 

Merger and acquisition market conditions can fluctuate drastically due to circumstances beyond anyone’s control.  No matter how well an acquisition candidate performs, it must be considered within the context of the overall marketplace.

• Operating Environment:  regulatory and administrative.  Each segment within the healthcare services industry is subject to its own set of operating parameters that can impact value.  Whether it may be PPS in Medicare, Competitive Bidding in DME or business mix in staffing, external operating conditions can definitely stimulate or diminish activity in the market.

• Buyers in the Market:  perceptions and premiums.  How buyers perceive acquisition targets in the marketplace is a very important component of value.  Of course buyers want stable, growing companies with competent employees.  Additionally, buyers need to be confident that they can reproduce and build upon the success of the selling company after the seller has moved on.  Many buyers also tend to avoid or discount acquisition candidates that are dependant on one or two primary clients.  For a buyer to pay a premium, the acquisition candidate has to be performing well at the time of transaction, but must have solid future prospects and genuine upside potential.

• Sellers in the Market:  presentation and communication.  A company may be very valuable, but if the seller doesn’t make a clear and convincing presentation to prospective buyers, it will not earn the premium price that may be warranted.  Sellers should provide a concise summary of services offered, major payors, and financial performance.  All liabilities and their proposed dispensation should be disclosed.  Sellers need to maintain the momentum of the transaction by providing follow up data to qualified buyers in a timely fashion.  If the seller is enthusiastic about the transaction, buyers will be responsive: If the seller is reticent, buyers may lose interest and the deal might not close.

Most deals do close! With proper care and consideration, both buyers and sellers can develop reasonable expectations and can unlock the maximum value of their companies through mergers, acquisitions and divestitures.