actionsPrint Blog Post
Benefits of Hiring a Transaction Advisor When Selling Your Practice
Working in transactions, one of the most common questions I get from owners is: “Do I need an advisor to help me sell my practice?” My answer is almost always “yes,” given the acceleration of private equity (PE) investing in medical practices.
So far in 2021, PE or PE-funded management services organizations (MSOs) have made up about 65 percent of buyers in medical practice mergers and acquisitions (M&A).1 The flood of PE dollars into health care practices has driven several dynamic changes when selling, including increased valuations and deal sophistication. This is where a strong transaction advisor can help, but it begs the question: Who is an M&A advisor, and what does that person do?
Who is an M&A Advisor?
The term M&A advisor is synonymous with investment banker, broker, and intermediary. A sell-side advisor works for the seller of a business. As such, the advisor represents the seller’s interests and has a fiduciary responsibility to pursue the best deal for the client.
Often advisors are licensed through the Financial Industry Regulatory Authority (FINRA), which is comparable to the American Bar Association for lawyers. However, M&A advisors are not lawyers and are different from business brokers. Business brokers help market businesses for sale, but their services are limited, and they typically work on smaller, less complex deals.
Meanwhile, sell-side M&A advisors provide services collectively called the M&A process, or sale process. This process has prescribed steps designed to maximize the seller’s leverage in the market and ultimately deliver the best outcome. Typically, the deal process lasts about six months from beginning to end and consists of these four phases:
What to Look for in an Advisor?
Skilled M&A advisors give practice owners peace of mind throughout the sale process, as they have experience in the following areas to help ensure a beneficial deal.
Critical Deal Experience
Experience matters when it comes to avoiding problems and creating a great outcome. Having worked on more than 100 deals in my career, I can confidently say that no two are identical. However, most share certain similarities and variations, and a thorough understanding of both is critical when completing a deal. For instance, knowledgeable M&A advisors can help sellers customize the process and navigate unusual circumstances, like an associate deciding to leave the practice prior to it selling.
Deal experience also allows good advisors to answer important market factors for the practice such as:
- Who are likely the best potential buyers,
- How much the practice is worth, and
- What is a reasonable deal structure?
Knowing the market allows advisors to prioritize negotiation points and push for deal terms that are of the highest priority for the seller. A mistake I see made by inexperienced dealmakers is trying to enhance deal terms that are already at the top end of the market — and therefore will ultimately not improve — rather than focusing on items that are changeable and important to the seller.
Pursuing a sale can be incredibly time-consuming for practice owners and their staff. It requires collecting and producing information for interested parties, responding to follow-up questions, reviewing legal documents, and carrying out a long list of other activities. Sell-side advisors can shoulder much of this workload. This is particularly helpful when owners are not quite ready to disclose their intent to sell to the whole team during the initial stages.
Furthermore, advisors have established best practices to maximize leverage and ensure efficient execution of each phase of the deal. While practice owners and staff leaders still play a significant role in the process, the improved efficiency and increased bench strength that comes with an advisor allows them to focus on running the practice at the exact time it needs to thrive.
Leverage with Buyers
M&A advisors can create and utilize leverage with buyers in many ways, including those listed below.
1. Creating competition. The sale process is intentionally designed to create competition among buyers, funneling them into a situation where they must review and decide on an investment simultaneously. Private equity groups (PEGs) understand this process well. In fact, many PE professionals started their careers as investment bankers, running M&A processes for clients. Therefore, they understand that when an advisor is involved, there is a formal sale process in place. The mere existence of that process is enough to make buyers put their best foot forward and keep up competitive pressure.
2. Monitoring buyer behavior. Many practices receive unsolicited offers from PE-backed MSOs, and physician owners often wonder if it is worth hiring a transaction advisor if a buyer has already fallen into their lap. Again, if PE is involved, you should have an M&A advisor if for no other reason than to keep the buyer on best behavior.
The M&A world is small, especially within specialty industries like medical practices. It doesn’t take long for people in the industry to establish reputations. PEGs are in the business of doing M&A at high volumes, and they know that M&A advisors provide significant deal flow. They also know a bad reputation among M&A advisors can dry up their deal flow faster than almost anything else. Hiring a well-known industry advisor is often enough to keep most PEG buyers relatively honest.
3. Playing bad cop. Going through an M&A deal is similar to dating. It involves courting several different potential partners, with each side getting to know one another, determining what the other has to offer, and deciding if they’re interested. At some point, a buyer and seller choose to “get engaged” by signing an LOI.
Occasionally during this process, a tough negotiation or some bad news needs to be delivered. Having an advisor who can act as the “bad cop” helps deflect any potential negative feelings between the two parties who intend to “marry.” Just like with any engagement, it is best to start a partnership void of any negative feelings to facilitate a harmonious union.
Tap into an Advisor
If you are a practice owner who has decided to pursue a sale for your business, congratulations! It is a very exciting experience. To maximize what will likely be the most important deal of your life, hiring an M&A advisor to provide deal experience, market knowledge, bench strength, and leverage with buyers is highly recommended. With an advisor, you’ll be able to pursue the best opportunity for your practice and have a smoother sales process.
As Vice President of Transaction Services for BSM, I would be happy to help. Either contact me directly for more information or stop by BSM Booth #955 at the upcoming American Academy of Ophthalmology (AAO) meeting from Nov. 13-15 to discuss your options.
SEEKING ADDITIONAL INFORMATION? BSM Connection members can join our Nov. 18 webinar titled "Considering a Sale? A Primer for Selling Your Practice to an Outside Party." Log in and register for the session today!
1. Publicly disclosed transactions per Capital IQ.