There are numerous factors that an investment banker must consider when screening for healthcare deal quality. Each phase of the deal process has its own unique characteristics, oftentimes starting long before a deal comes to market. Some key considerations for investment bankers in the healthcare space include relationship building, evaluation of the management team, due diligence, and company metrics.
Developing a Relationship and Evaluating the Management Team:
A crucial aspect of screening for healthcare deal quality is relationship building. Erv Terwilliger of Tower Partners emphasized “I think trust is built over a long period of time, helping the owner think about things they haven’t thought of. We like building relationships with people before they know they want to go to market, helping them to think it through. I’d rather start having a conversation a year or two before they’re ready to sell – this allows us to get prepared and plan more effectively.” Evaluating the management team is also vital. Steve Higgins of Delancey Street Partners, LLC stated that “A lot of it comes down to the quality of the management team. Are they able to articulate a compelling story about the business?
The Due Diligence Process:
The due diligence process in screening for healthcare deal quality also requires a disciplined approach. Lana Simkina of Eureka Capital Partners, LLC shared, “We do a lot of detailed due diligence to understand value drivers and the business model along with potential risks and the competitive environment. We believe that upfront diligence is very important so that the company is properly positioned for the buyer universe. Depending on our clients’ objectives, we focus not only on price but also on other critical deal terms such as owner’s equity rollover, deferred compensation, indemnification provisions, and other terms in a sale and purchase agreement.” Higgins added “The other thing is the quality of financial information. Do they have reviewed statements and an annual budget where they track and monitor progress against that budget? That would suggest a level of sophistication that is required in order to actually get through an M&A process.”
Need for Metrics and Risk Evaluation:
Metrics also play a crucial role when assessing healthcare deal quality. Jared Behnke of Transitus Capital said “We’re looking for healthy businesses and we have some basic metrics we’re looking for to understand where the business has been. We’re going to ask for basic financial statements over three years. We’re also going to ask for some detail on potential customer concentration and vendor concentration to understand where potential pitfalls might be and where an acquirer might view it as a risky business.”
By focusing on these critical factors – relationship building, evaluation of the management team, due diligence, and key metrics – investment bankers ensure they screen for healthcare deal quality thoroughly and effectively.
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By Bill Bowler, Opus Connect
August 2024
