By Lou Sokolovskiy, Founder & CEO at Opus Connect
April 2021

Adapting to Our Post-Pandemic Landscape: Insights from the Opus Connect Community On Seven Key Challenges Facing the Middle Market M&A Healthcare Sector

This month, Opus Connect is taking a look at the healthcare sector, especially since it has been closely watched and played an essential global role as we recover from the COVID-19 pandemic. Through our discussions with active middle-market deal makers, we’ve gathered their insights into one place to promote awareness of current practices as well as the speed and growth potential for deals going forward.

In a direct response to the COVID-19 pandemic, the healthcare sector is changing and growing, seeing greater utilization of digital resources and new technologies as some – but not all – parts of the deal process transition to virtual interactions and events. As the global scenario changes, business processes are adapting and growing in a variety of ways – here are seven challenges facing healthcare and how we can use these insights to make informed decisions during every step of the deal process.

1. Create an in-person and virtual hybrid model

In a sharp upward trend since the fall of 2020, deal professionals are once again traveling to meet prospective buyers, sellers, and capital providers. The majority of respondents are once again conducting in-person meetings, with greater virtual meetings augmenting the previous in-person processes. James Olsen, Founder & Managing Partner at Concord Health Partners, provides insight into this new hybrid process by noting that for a time, “there were a couple deals where we did everything virtually,” and, ultimately, during the late summer and fall we were able to meet in person. I think we’ve become comfortable operating virtually and doing our diligence and having lots of engagement through video. It’s been efficient.” As the pandemic levels grew throughout the winter and are presently showing signs of decreasing with the rollout of multiple vaccines, this hybrid process of both virtual and in-person meetings is likely to be more prevalent going forward.

2. Adjust expectations to a longer deal flow timeline

Quite a few of the deal pros that we interviewed told us that the entire deal process timeline is now longer, with in-person meetings being spaced further apart. This, in turn, necessitates more meetings and conversations that act as check-ins during certain points of the due diligence process. Understandably, less time in person means a decrease in quality interactions, which can create “more delays at every step of the process than before,” especially as valuations are being done remotely with digital tools.

Opus Connect member Andrew Polsky, Principal at Alter Recovery, mentioned some challenges faced regarding the reimbursement side of the business. He notes that “as more people are seeking treatment, the insurance companies are gathering more data, and this increase in information is leading to them clapping down on payment and compressing the reimbursement structure.” Polsky’s insight here provides a window into how and why this veritable avalanche of data is creating longer timelines.

Joseph Ibrahim, Managing Partner at MBF Healthcare Partners, contributed his thoughts, stating that “as we evaluate due diligence, the usual complexities in understanding and developing integration plans presents the challenge of understanding performance” in a post-COVID-19 landscape. Essentially, the risks surrounding purchasing are less apparent as the healthcare industry copes with the demands of the pandemic, thus creating new challenges in conducting due diligence. Our modern healthcare system has not dealt with such a large-scale challenge until now, so we must be mindful of how this affects company performance.

3. How to cope with new, more cautious lending practices

Obtaining debt financing often poses a number of challenges even when there isn’t a global pandemic to contend with – banks are quite cautious at the moment, and facing that cautious behavior is currently seen as a top challenge. In describing the overall state of the debt market, Opus Connect’s M&A network provided valuable insight the lending climate. Brandon Bethea, Co-Founder and Partner at Aterian Investment Partners notes that “our financing went well because by the time we actually entered the market, the market was largely healed.” This sentiment was echoed by Don McDonough, Managing Director at JLL Partners, who said that capital markets have largely returned to where they were pre-pandemic. Additional insight from Renee McCalla-Taylor, Co-Founder & Managing Partner of 4C Capital, discusses the importance of remaining flexible: “We have a lot of flexibility in terms on how we look at deals. We work alongside with the other side so everyone’s happy, so that we can get what we need to get done and get to the finish line.” The characterization of the healthcare sector as “good” and “aggressive” by several respondents is indicative of a rebounding, if not accelerating, market, at least for healthcare.

In addition, it is important to note that the market is not seeing many discounts due to COVID-19. While a few in our community have received discounts, this is not something that should be counted on and most deal flow professionals are not experiencing discount offers.

4. Adjust EBITDA to assess the COVID-19 impact

When calculating earnings, M&A professionals will almost certainly have to adjust EBITDA to account for the COVID-19 impact. This is not necessarily a negative aspect of our new landscape, as increased scrutiny at the beginning can create positive outcomes in the long run as the business continues to grow. If a business or industry vertical has survived or even thrived in 2020 and into 2021, the forecast has great potential for the years to come.

If you’re seeing more challenges than opportunities, you aren’t alone. Regarding EBITDA adjustments, Brandon Bethea described a particular use case in which the challenges of COVID-19 impacted product sales and profitability. “In this case, we were negatively impacted COVID-19. Our product is used in surgeries, both required and elective, and there was a period of time during the year where for elective surgeries in particular were shut down. In addition, the family was very focused on its workforce, culture, and sustainability of that culture. We had to do our diligence and decide for ourselves if we feel like the market opportunity is coming back for this asset.” Since that time, elective procedures and other surgeries are resuming. It is likely that COVID’s impact will be felt less going forward and its absence will create a spike in profitability for this particular company.

5. Pricing and quality of deals is on the rise, but quantity is down

How middle-market M&A professionals in healthcare are viewing pricing, quality, and quantity of deals varies with fluctuations particular to their subsector in the healthcare space. Overall, pricing seems to have remained the steady? or increased, evidence that the healthcare sector is bouncing back from the blows dealt by 2020 and COVID-19 – thus demonstrating market confidence that will provide a boost to middle-market M&A. In fact, zero respondents in our community described deal quality as worse, a telling metric that is showing positive trajectory for the first time in a year.

Quantity of available deals is down according to healthcare deal professionals, and this contraction of deals is expected given some of the stagnation created by multiple lockdowns, the inability to travel, and a slowdown in lending as a result of market uncertainty.

6. Seeking capital partners requires a business development mindset

Cultivating and growing your network are two of the building blocks we focus on at Opus Connect. When it comes to seeking capital partners, Andrew Polsky provides solid, actionable advice that can be readily implemented by the Opus Connect community. He states that “we’re looking for somebody who understands the space, as our place within healthcare is very unique and requires understanding of insurance reimbursement, Medicare, and opportunity on the real state side of the business. We want somebody who can join us in the journey.” Research into the more nuanced aspects of a deal will create better relationships and connections, especially alongside a robust business development strategy. Reach out to your existing network, but don’t be afraid to try new avenues and untapped resources when seeking partnerships.

7. Keep investing in digital growth

The biggest trend for 2021 discussed by Opus Connect’s network of M&A experts is the continued use of telemedicine and any technologies that support home care or virtual appointments. Adam Fried, Partner at The K Fund, concurs with this, noting that he sees trends focusing “around bringing technology and technology solutions into the antiquated parts of the health care system in the U.S.” Since far fewer processes are automated and digital in large, slow-to-adopt sectors like healthcare, further implementation of technology is needed to secure future growth. Andrew Polsky refers to this as “filling gaps in our business” as healthcare continues to adapt and change to fill the vast need created from an unprecedented global health event.

What challenges have you seen lately in your sector? Do they mirror the challenges and opportunities we’re seeing in healthcare? Tell us more on LinkedIn, Instagram, Facebook, or Twitter! @opusconnect.